UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☑ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
For the Quarterly Period Ended March 31, 2024
| ☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
For the transition period from to
Commission File Number 001-35406
Illumina, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 33-0804655 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
5200 Illumina Way, San Diego, CA 92122
(Address of principal executive offices) (Zip code)
(858) 202-4500
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock, $0.01 par value | ILMN | The Nasdaq Stock Market LLC | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | þ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13a of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
As of April 26, 2024, there were 159.3 million shares of the registrant’s common stock outstanding.
ILLUMINA, INC.
FORM 10-Q
FOR THE FISCAL QUARTER ENDED MARCH 31, 2024
TABLE OF CONTENTS
See “Form 10-Q Cross-Reference Index” within Other Key Information for a cross-reference to the parts and items requirements of the Securities and Exchange Commission Quarterly Report on Form 10-Q.
| CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | PAGE | ||||
| MANAGEMENT’S DISCUSSION & ANALYSIS | |||||
| OTHER KEY INFORMATION | |||||
2
Consideration Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains, and our officers and representatives may from time to time make, “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Words such as: “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “continue,” “project,” “estimate,” “expect,” “strategy,” “future,” “likely,” “may,” “potential,” “predict,” “should,” “will,” or similar words or phrases, or the negatives of these words, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward looking. Examples of forward-looking statements include, among others, statements we make regarding:
•our expectations as to our future financial performance, results of operations, or other operational results or metrics;
•the benefits that we expect will result from our business activities and certain transactions we have completed, or may complete, such as product introductions, increased revenue, decreased expenses, and avoided expenses and expenditures;
•our expectations of the effect on our financial condition of claims, litigation, contingent liabilities, and governmental investigations, proceedings, and regulations;
•our strategies or expectations for product development, market position, financial results, and reserves;
•our ability to successfully implement cost reduction plans in a timely manner and the possibility that costs associated with our cost reduction plans are greater than we anticipate;
•our expectations regarding the pending divestiture of GRAIL, LLC (f/k/a GRAIL, Inc.) (GRAIL);
•the transitional measures imposed by the European Commission in connection with our acquisition of GRAIL, the duration and impact of such measures on Illumina and GRAIL, and the appointment of a monitoring trustee to monitor our compliance with such measures;
•the prohibition decision adopted by the European Commission on September 6, 2022 (the Prohibition Decision), informing us of its decision to prohibit our acquisition of GRAIL, and the decision adopted by the European Commission on October 12, 2023, requiring us to (among other things) divest GRAIL and imposing transitional measures (the EC Divestment Decision);
•any future order issued by the Federal Trade Commission (FTC) requiring us to, among other things, divest GRAIL and to hold GRAIL separate through the completion of the divestiture;
•the Article 14(2)(b) fine imposed by the European Commission on July 12, 2023; and
•other expectations, beliefs, plans, strategies, anticipated developments, and other matters that are not historical facts.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy, and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
•our expectations and beliefs regarding prospects and growth for our business and the markets in which we operate;
•the timing and mix of customer orders among our products and services;
•challenges inherent in developing, manufacturing, and launching new products and services, including expanding manufacturing operations and reliance on third-party suppliers for critical components;
3
•the impact of recently launched or pre-announced products and services on existing products and services;
•risks and uncertainties regarding legal and regulatory proceedings, including the failure to obtain or delays in obtaining the required regulatory approvals or clearances including for the divestiture of GRAIL and other actions that have been or may be taken or pursued by the European Commission, the FTC and/or other governmental or regulatory authorities in connection with such acquisition;
•the burdensome transitional measures and hold separate requirements imposed by the European Commission, the duration and impact of these requirements on Illumina and GRAIL (which may include additional costs or liabilities, loss of revenue and other adverse effects on our business, financial condition and results of operations), the administration of these requirements by an appointed monitoring trustee and the risk that the European Commission could impose or seek to impose additional fines and other penalties for alleged noncompliance with these requirements;
•the EC Divestment Decision and any future FTC order, which may each adversely affect us and our business, including current plans and operations, financial condition and results of operations, each requiring us to divest GRAIL and to hold GRAIL separate through the completion of the divestiture, the terms and conditions thereof (including with respect to a divestiture of GRAIL), and the timing of and the risks, costs and business disruptions (including the diversion of management’s attention) associated with such divestiture and/or any related appeals, the implementation thereof or any associated legal or regulatory proceedings or obligations, including any related appeals, and other uncertainties related to our compliance (or ability to comply) with each of the EC Divestment Decision and any future FTC order, which may adversely affect us and our business, including current plans and operations, financial condition and results of operations;
•risks associated with contracts or other agreements containing provisions that might be implicated by any divestiture of GRAIL or other aspects of the EC Divestment Decision, including our ability to fully realize the anticipated economic benefits of our commercial arrangements with GRAIL and our obligations with respect to contingent value rights (the CVRs) issued by us in connection with the GRAIL acquisition and the risk that we will be unable to fully discharge such obligations in connection with a divestiture of GRAIL, that a divestiture will result in a change in obligor on the CVRs and/or of other consequences related thereto, which may adversely affect us and our business and/or the market value of the CVRs;
•our ability to satisfy the necessary conditions to consummate the divestiture of GRAIL on a timely basis or at all, due to the requirements under the EC Divestment Decision;
•the risks and costs associated with the divestiture of GRAIL;
•the risk of adverse effects resulting from additional potential litigation associated with the acquisition of GRAIL, such as additional legal, financial advisory, regulatory and other professional services fees;
•the risk of additional litigation arising against us in connection with the GRAIL acquisition;
•the assumptions underlying our critical accounting policies and estimates;
•our assessments and estimates that determine our effective tax rate;
•our assessments and beliefs regarding the outcome of pending legal proceedings and any liability that we may incur as a result of those proceedings, as well as the cost and potential diversion of management resources associated with these proceedings;
•uncertainty, or adverse economic and business conditions, including as a result of slowing or uncertain economic growth, public health crisis, or armed conflict; and
•other factors detailed in our filings with the Securities and Exchange Commission (SEC), including the risks, uncertainties, and assumptions described in “Risk Factors” within the Business & Market Information section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, the “Risk Factors” section below, or in information disclosed in public conference calls, the date and time of which are released beforehand.
4
Any forward-looking statement made by us in this Quarterly Report on Form 10-Q is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation, and do not intend, to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, or to review or confirm analysts’ expectations, or to provide interim reports or updates on the progress of any current financial quarter, in each case whether as a result of new information, future developments, or otherwise.
5
| CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | ||
ILLUMINA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
| March 31, 2024 | December 31, 2023 | ||||||||||
| (Unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 1,108 | $ | 1,048 | |||||||
| Accounts receivable, net | 635 | 734 | |||||||||
| Inventory, net | 584 | 587 | |||||||||
| Prepaid expenses and other current assets | 256 | 240 | |||||||||
| Total current assets | 2,583 | 2,609 | |||||||||
| Property and equipment, net | 964 | 1,007 | |||||||||
| Operating lease right-of-use assets | 550 | 544 | |||||||||
| Goodwill | 2,545 | 2,545 | |||||||||
| Intangible assets, net | 2,940 | 2,993 | |||||||||
| Other assets | 458 | 413 | |||||||||
| Total assets | $ | 10,040 | $ | 10,111 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 201 | $ | 245 | |||||||
| Accrued liabilities | 1,273 | 1,325 | |||||||||
| Total current liabilities | 1,474 | 1,570 | |||||||||
| Operating lease liabilities | 700 | 687 | |||||||||
| Term notes | 1,490 | 1,489 | |||||||||
| Other long-term liabilities | 642 | 620 | |||||||||
| Stockholders’ equity: | |||||||||||
| Common stock | 2 | 2 | |||||||||
| Additional paid-in capital | 9,658 | 9,555 | |||||||||
| Accumulated other comprehensive income (loss) | 12 | (1) | |||||||||
Accumulated deficit | (145) | (19) | |||||||||
| Treasury stock, at cost | (3,793) | (3,792) | |||||||||
| Total stockholders’ equity | 5,734 | 5,745 | |||||||||
| Total liabilities and stockholders’ equity | $ | 10,040 | $ | 10,111 | |||||||
See accompanying notes to condensed consolidated financial statements.
6
ILLUMINA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In millions, except per share amounts)
| Three Months Ended | |||||||||||
| March 31, 2024 | April 2, 2023 | ||||||||||
| Revenue: | |||||||||||
| Product revenue | $ | 876 | $ | 922 | |||||||
| Service and other revenue | 200 | 165 | |||||||||
| Total revenue | 1,076 | 1,087 | |||||||||
| Cost of revenue: | |||||||||||
| Cost of product revenue | 255 | 285 | |||||||||
| Cost of service and other revenue | 106 | 99 | |||||||||
| Amortization of acquired intangible assets | 48 | 48 | |||||||||
| Total cost of revenue | 409 | 432 | |||||||||
| Gross profit | 667 | 655 | |||||||||
| Operating expense: | |||||||||||
| Research and development | 339 | 341 | |||||||||
| Selling, general and administrative | 439 | 378 | |||||||||
| Total operating expense | 778 | 719 | |||||||||
| Loss from operations | (111) | (64) | |||||||||
| Other income (expense): | |||||||||||
| Interest income | 12 | 17 | |||||||||
| Interest expense | (18) | (20) | |||||||||
| Other income (expense), net | 8 | (11) | |||||||||
| Total other income (expense), net | 2 | (14) | |||||||||
| Loss before income taxes | (109) | (78) | |||||||||
| Provision (benefit) for income taxes | 17 | (81) | |||||||||
| Net (loss) income | $ | (126) | $ | 3 | |||||||
(Loss) earnings per share: | |||||||||||
| Basic | $ | (0.79) | $ | 0.02 | |||||||
| Diluted | $ | (0.79) | $ | 0.02 | |||||||
Shares used in computing (loss) earnings per share: | |||||||||||
| Basic | 159 | 158 | |||||||||
| Diluted | 159 | 158 | |||||||||
See accompanying notes to condensed consolidated financial statements.
7
ILLUMINA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In millions)
| Three Months Ended | |||||||||||
| March 31, 2024 | April 2, 2023 | ||||||||||
| Net (loss) income | $ | (126) | $ | 3 | |||||||
Unrealized gain (loss) on cash flow hedges, net of deferred tax | 13 | (4) | |||||||||
| Total comprehensive loss | $ | (113) | $ | (1) | |||||||
See accompanying notes to condensed consolidated financial statements.
8
ILLUMINA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In millions)
| Additional | Accumulated Other | Retained | Total | ||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Paid-In | Comprehensive | Earnings | Treasury Stock | Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Income (Loss) | (Accumulated Deficit) | Shares | Amount | Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2023 | 198 | $ | 2 | $ | 9,207 | $ | 3 | $ | 1,142 | (40) | $ | (3,755) | $ | 6,599 | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 3 | — | — | 3 | |||||||||||||||||||||||||||||||||||||||
| Unrealized loss on cash flow hedges, net of deferred tax | — | — | — | (4) | — | — | — | (4) | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net of repurchases | — | — | 37 | — | — | — | (9) | 28 | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 67 | — | — | — | — | 67 | |||||||||||||||||||||||||||||||||||||||
| Balance as of April 2, 2023 | 198 | 2 | 9,311 | (1) | 1,145 | (40) | (3,764) | 6,693 | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (234) | — | — | (234) | |||||||||||||||||||||||||||||||||||||||
| Unrealized gain on cash flow hedges, net of deferred tax | — | — | — | 13 | — | — | — | 13 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net of repurchases | — | — | — | — | — | — | (3) | (3) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 77 | — | — | — | — | 77 | |||||||||||||||||||||||||||||||||||||||
| Reclassification of liability-classified awards | — | — | 9 | — | — | — | — | 9 | |||||||||||||||||||||||||||||||||||||||
| Balance as of July 2, 2023 | 198 | 2 | 9,397 | 12 | 911 | (40) | (3,767) | 6,555 | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (754) | — | — | (754) | |||||||||||||||||||||||||||||||||||||||
| Unrealized gain on cash flow hedges, net of deferred tax | — | — | — | 9 | — | — | — | 9 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net of repurchases | — | — | 30 | — | — | — | (2) | 28 | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 60 | — | — | — | — | 60 | |||||||||||||||||||||||||||||||||||||||
| Balance as of October 1, 2023 | 198 | 2 | 9,487 | 21 | 157 | (40) | (3,769) | 5,898 | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (176) | — | — | (176) | |||||||||||||||||||||||||||||||||||||||
| Unrealized loss on cash flow hedges, net of deferred tax | — | — | — | (22) | — | — | — | (22) | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net of repurchases | 1 | — | (3) | — | — | — | (23) | (26) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 71 | — | — | — | — | 71 | |||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2023 | 199 | $ | 2 | $ | 9,555 | $ | (1) | $ | (19) | (40) | $ | (3,792) | $ | 5,745 | |||||||||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
9
ILLUMINA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In millions)
| Additional | Accumulated Other | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Paid-In | Comprehensive | Accumulated | Treasury Stock | Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | (Loss) Income | Deficit | Shares | Amount | Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2023 | 199 | $ | 2 | $ | 9,555 | $ | (1) | $ | (19) | (40) | $ | (3,792) | $ | 5,745 | |||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (126) | — | — | (126) | |||||||||||||||||||||||||||||||||||||||
| Unrealized gain on cash flow hedges, net of deferred tax | — | — | — | 13 | — | — | — | 13 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net of repurchases | — | — | 36 | — | — | — | (1) | 35 | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 67 | — | — | — | — | 67 | |||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2024 | 199 | $ | 2 | $ | 9,658 | $ | 12 | $ | (145) | (40) | $ | (3,793) | $ | 5,734 | |||||||||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
10
ILLUMINA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
| Three Months Ended | |||||||||||
| March 31, 2024 | April 2, 2023 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net (loss) income | $ | (126) | $ | 3 | |||||||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |||||||||||
| Depreciation expense | 59 | 57 | |||||||||
| Amortization of intangible assets | 49 | 50 | |||||||||
| Share-based compensation expense | 96 | 93 | |||||||||
| Deferred income taxes | (24) | (17) | |||||||||
Property and equipment and right-of-use asset impairment | 32 | — | |||||||||
Net (gains) losses on strategic investments | (5) | 16 | |||||||||
Gain on Helix contingent value right | (3) | (3) | |||||||||
| Change in fair value of contingent consideration liabilities | 16 | (1) | |||||||||
| Other | 9 | 7 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | 90 | 1 | |||||||||
| Inventory | 4 | (18) | |||||||||
| Prepaid expenses and other current assets | (23) | (17) | |||||||||
| Operating lease right-of-use assets and liabilities, net | (7) | (5) | |||||||||
| Other assets | (6) | 2 | |||||||||
| Accounts payable | (37) | (46) | |||||||||
| Accrued liabilities | (53) | (123) | |||||||||
| Other long-term liabilities | 6 | 11 | |||||||||
| Net cash provided by operating activities | 77 | 10 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of property and equipment | (36) | (52) | |||||||||
| Purchases of strategic investments | (12) | (3) | |||||||||
| Cash paid for intangible asset | — | (1) | |||||||||
| Net cash used in investing activities | (48) | (56) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Debt issuance costs paid for credit facility | — | (1) | |||||||||
Payments on financing obligations | — | (500) | |||||||||
| Taxes paid related to net share settlement of equity awards | (1) | (9) | |||||||||
| Proceeds from issuance of common stock | 36 | 37 | |||||||||
| Net cash provided by (used in) financing activities | 35 | (473) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (4) | 2 | |||||||||
| Net increase (decrease) in cash and cash equivalents | 60 | (517) | |||||||||
| Cash and cash equivalents at beginning of period | 1,048 | 2,011 | |||||||||
| Cash and cash equivalents at end of period | $ | 1,108 | $ | 1,494 | |||||||
See accompanying notes to condensed consolidated financial statements.
11
ILLUMINA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Unless the context requires otherwise, references in this report to “Illumina,” the “Company,” “we,” “us,” and “our” refer to Illumina, Inc. and its consolidated subsidiaries.
| 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES | ||
We are a provider of sequencing- and array-based solutions, serving customers in the research, clinical and applied markets. Our products are used for applications in the life sciences, oncology, reproductive health, agriculture and other emerging segments. Our customers include leading genomic research centers, academic institutions, government laboratories, and hospitals, as well as pharmaceutical, biotechnology, commercial molecular diagnostic laboratories, and consumer genomics companies.
On August 18, 2021, we acquired GRAIL, a healthcare company focused on early detection of multiple cancers. The acquisition is subject to ongoing legal proceedings, and, currently, GRAIL must be held and operated separately and independently from Illumina pursuant to the transitional measures ordered by the European Commission in the EC Divestment Decision, following the prohibition of our acquisition of GRAIL on September 6, 2022. On December 17, 2023, we announced that we will divest GRAIL, and on April 12, 2024, the European Commission formally approved our divestment plan with respect to GRAIL, which had been submitted pursuant to the EC Divestment Decision. Refer to note “7. Legal Proceedings” for additional details.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Interim financial results are not necessarily indicative of results anticipated for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2023, from which the prior year balance sheet information herein was derived. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expense, and related disclosure of contingent assets and liabilities. Though macroeconomic factors such as inflation, exchange rates fluctuations and concerns about an economic downturn present additional uncertainty, we continue to use the best information available to form our critical accounting estimates. Actual results could differ from those estimates.
The unaudited condensed consolidated financial statements include our accounts, our wholly-owned subsidiaries, and majority-owned or controlled companies. All intercompany transactions and balances have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation. In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the results for the interim periods presented.
Fiscal Year
Our fiscal year is the 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, September 30, and December 31. References to Q1 2024 and Q1 2023 refer to the three months ended March 31, 2024 and April 2, 2023, respectively, which were both 13 weeks.
12
Significant Accounting Policies
During Q1 2024, there were no changes to our significant accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, with the exception of the following for income taxes:
Other than in Q2 2023, we historically calculated the provision/(benefit) for income taxes for interim periods utilizing an estimated annual effective tax rate applied to the income/(loss) for the reporting period. In accordance with the authoritative guidance for accounting for income taxes in interim periods, we concluded for Q1 2024 that it was appropriate to determine the provision for income taxes utilizing the year-to-date effective tax rate method. Since minor changes in the estimated income/(loss) before income taxes would result in significant changes in the estimated annual effective tax rate, we determined the year-to-date effective tax rate method would provide a more reliable estimate of the provision for income taxes for Q1 2024.
Accounting Pronouncements Pending Adoption
In December 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures. The new standard requires a company to disclose incremental segment information on an annual and interim basis, including significant segment expenses and measures of profit or loss that are regularly provided to the chief operating decision maker (CODM). The standard is effective for us beginning in fiscal year 2024 and interim periods within fiscal year 2025, with early adoption permitted. We do not expect to early adopt the new standard. We are currently evaluating the impact of ASU 2023-07 on the consolidated financial statements and related disclosures and will adopt the new standard using a retrospective approach.
In December 2023, the FASB also issued ASU 2023-09, Income Taxes (Topic 740) - Improvements to Income Tax Disclosures. The new standard requires a company to expand its existing income tax disclosures, specifically related to the rate reconciliation and income taxes paid. The standard is effective for us beginning in fiscal year 2025, with early adoption permitted. We do not expect to early adopt the new standard. The new standard is expected to be applied prospectively, but retrospective application is permitted. We are currently evaluating the impact of ASU 2023-09 on the consolidated financial statements and related disclosures.
(Loss) Earnings per Share
Basic (loss) earnings per share is computed based on the weighted average number of common shares outstanding during the period. Diluted (loss) earnings per share is computed based on the sum of the weighted average number of common shares and potentially dilutive common shares outstanding during the period. In loss periods, basic and diluted loss per share are identical since the effect of potentially dilutive common shares is antidilutive and therefore excluded. Potentially dilutive common shares from equity awards are determined using the average share price for each period under the treasury stock method. In addition, proceeds from exercise of equity awards and the average amount of unrecognized compensation expense for equity awards are assumed to be used to repurchase shares.
The following table presents the weighted average shares used to calculate basic and diluted (loss) earnings per share:
| In millions | Q1 2024 | Q1 2023 | |||||||||
Weighted average shares used in calculating basic (loss) earnings per share | 159 | 158 | |||||||||
Weighted average shares used in calculating diluted (loss) earnings per share | 159 | 158 | |||||||||
| Antidilutive shares: | |||||||||||
| Equity awards | 3 | 1 | |||||||||
| Convertible senior notes | — | 2 | |||||||||
| Potentially dilutive shares excluded from calculation due to antidilutive effect | 3 | 3 | |||||||||
| 2. REVENUE | ||
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genotyping and sequencing services, instrument service contracts, development and licensing agreements, and cancer detection testing services related to the GRAIL business.
Revenue by Source
| Q1 2024 | Q1 2023 | ||||||||||||||||||||||||||||||||||
| In millions | Sequencing | Microarray | Total | Sequencing | Microarray | Total | |||||||||||||||||||||||||||||
| Consumables | $ | 691 | $ | 71 | $ | 762 | $ | 686 | $ | 78 | $ | 764 | |||||||||||||||||||||||
| Instruments | 110 | 4 | 114 | 152 | 6 | 158 | |||||||||||||||||||||||||||||
| Total product revenue | 801 | 75 | 876 | 838 | 84 | 922 | |||||||||||||||||||||||||||||
| Service and other revenue | 178 | 22 | 200 | 138 | 27 | 165 | |||||||||||||||||||||||||||||
| Total revenue | $ | 979 | $ | 97 | $ | 1,076 | $ | 976 | $ | 111 | $ | 1,087 | |||||||||||||||||||||||
Revenue by Geographic Area
| Based on region of destination (in millions) | Q1 2024 | Q1 2023 | |||||||||
| Americas | $ | 603 | $ | 616 | |||||||
| Europe | 279 | 261 | |||||||||
Greater China(1) | 78 | 91 | |||||||||
Asia-Pacific, Middle East, and Africa(2) | 116 | 119 | |||||||||
| Total revenue | $ | 1,076 | $ | 1,087 | |||||||
_____________
(1)Region includes revenue from China, Taiwan, and Hong Kong.
(2)Region includes revenue from Russia and Turkey.
Performance Obligations
We regularly enter into contracts with multiple performance obligations. These contracts are believed to be firm as of the balance sheet date. However, we may allow customers to make product substitutions as we launch new products. The timing of shipments depends on several factors, including agreed upon shipping schedules, which may span multiple quarters. Most performance obligations are generally satisfied within a short time frame, approximately to six months, after the contract execution date. As of March 31, 2024, the aggregate amount of the transaction price allocated to remaining performance obligations was $796 million, of which approximately 87% is expected to be converted to revenue in the next twelve months, approximately 9% in the following twelve months, and the remainder thereafter.
Contract Assets and Liabilities
Contract assets, which consist of revenue recognized and performance obligations satisfied or partially satisfied in advance of customer billing, were $15 million and $18 million as of March 31, 2024 and December 31, 2023, respectively, and were recorded in prepaid expenses and other current assets.
Contract liabilities, which consist of deferred revenue and customer deposits, as of March 31, 2024 and December 31, 2023 were $324 million and $329 million, respectively, of which the short-term portions of $248 million and $252 million, respectively, were recorded in accrued liabilities and the remaining long-term portions were recorded in other long-term liabilities. Revenue recorded in Q1 2024 included $95 million of previously deferred revenue that was included in contract liabilities as of December 31, 2023.
| 3. INVESTMENTS AND FAIR VALUE MEASUREMENTS | ||
Strategic Investments
Non-Marketable Equity Securities
As of March 31, 2024 and December 31, 2023, the aggregate carrying amounts of our non-marketable equity securities without readily determinable fair values, included in other assets, were $28 million.
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Revenue recognized from transactions with our strategic investees was $2 million and $36 million for Q1 2024 and Q1 2023, respectively.
Venture Funds
We invest in two venture capital investment funds (the Funds) with capital commitments of $100 million, callable through April 2026, and up to $150 million, callable through July 2029, respectively, of which $4 million (plus recallable distributions of approximately $10 million) and up to $59 million, respectively, remained callable as of March 31, 2024. Our investments in the Funds are accounted for as equity-method investments. The aggregate carrying amounts of the Funds, included in other assets, were $185 million and $168 million as of March 31, 2024 and December 31, 2023, respectively. We recorded an unrealized gain of $6 million and an unrealized loss of $12 million in Q1 2024 and Q1 2023, respectively, in other income (expense), net.
Fair Value Measurements
The following table presents the hierarchy for assets and liabilities measured at fair value on a recurring basis:
| March 31, 2024 | December 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||
| In millions | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||||||||||||||||||||
| Money market funds (cash equivalents) | $ | 869 | $ | — | $ | — | $ | 869 | $ | 774 | $ | — | $ | — | $ | 774 | |||||||||||||||||||||||||||||||
| Marketable equity securities | 7 | — | — | 7 | 6 | — | — | 6 | |||||||||||||||||||||||||||||||||||||||
| Helix contingent value right | — | — | 71 | 71 | — | — | 68 | 68 | |||||||||||||||||||||||||||||||||||||||
| Deferred compensation plan assets | — | 66 | — | 66 | — | 61 | — | 61 | |||||||||||||||||||||||||||||||||||||||
| Total assets measured at fair value | $ | 876 | $ | 66 | $ | 71 | $ | 1,013 | $ | 780 | $ | 61 | $ | 68 | $ | 909 | |||||||||||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||
| Contingent consideration liabilities | $ | — | $ | — | $ | 403 | $ | 403 | $ | — | $ | — | $ | 387 | $ | 387 | |||||||||||||||||||||||||||||||
| Deferred compensation plan liability | — | 63 | — | 63 | — | 59 | — | 59 | |||||||||||||||||||||||||||||||||||||||
| Total liabilities measured at fair value | $ | — | $ | 63 | $ | 403 | $ | 466 | $ | — | $ | 59 | $ | 387 | $ | 446 | |||||||||||||||||||||||||||||||
Our marketable equity securities, which are included in prepaid expenses and other current assets, are measured at fair value based on quoted trade prices in active markets. Our deferred compensation plan assets consist primarily of investments in life insurance contracts carried at cash surrender value, which reflects the net asset value of the underlying publicly traded mutual funds. We perform control procedures to corroborate the fair value of our holdings, including comparing valuations obtained from our investment service provider to valuations reported by our asset custodians, validating pricing sources and models, and reviewing key model inputs, if necessary.
Helix Contingent Value Right
In conjunction with the deconsolidation of Helix Holdings I, LLC (Helix) in April 2019, we received a contingent value right with a 7-year term that entitles us to consideration dependent upon the outcome of Helix’s future financing and/or liquidity events. We elected the fair value option to measure the contingent value right received from Helix. The fair value of the contingent value right, included in other assets, is derived using a Monte Carlo simulation. Estimates and assumptions used in the Monte Carlo simulation include probabilities related to the timing and outcome of future financing and/or liquidity events, assumptions regarding collectability and volatility, and an estimated equity value of Helix. These unobservable inputs represent a Level 3 measurement because they are supported by little or no market activity and reflect our own assumptions in measuring fair value. Changes in the fair value of the Helix contingent value right, included in other income (expense), net during Q1 2024 were as follows:
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| In millions | |||||
| Balance as of December 31, 2023 | $ | 68 | |||
| Change in estimated fair value | 3 | ||||
| Balance as of March 31, 2024 | $ | 71 | |||
Contingent Consideration Liabilities
We reassess the fair value of contingent consideration related to acquisitions on a quarterly basis. Changes in the fair value of contingent consideration subsequent to the acquisition date are recognized in selling, general and administrative expense. The contingent value rights issued as part of the GRAIL acquisition entitle the holders to receive future cash payments on a quarterly basis (Covered Revenue Payments) representing a pro rata portion of certain GRAIL-related revenues (Covered Revenues) each year for a 12-year period. As defined in the Contingent Value Rights Agreement, this will reflect a 2.5% payment right to the first $1 billion of revenue each year for 12 years. Revenue above $1 billion each year will be subject to a 9% contingent payment right during this same period. Covered Revenues for Q4 2023 and Q4 2022 were $30 million and $23 million, respectively, driven primarily by sales of GRAIL’s Galleri test. Covered Revenue Payments relating to such periods were approximately $284,000 and $217,000 in Q1 2024 and Q1 2023, respectively. We use a Monte Carlo simulation to estimate the fair value of contingent consideration related to the GRAIL acquisition. Estimates and assumptions used in the Monte Carlo simulation include forecasted revenues for GRAIL, a revenue risk premium, a revenue volatility estimate, an operational leverage ratio and a counterparty credit spread. These unobservable inputs represent a Level 3 measurement because they are supported by little or no market activity and reflect our own assumptions in measuring fair value. The fair value of our contingent consideration liability related to GRAIL was $403 million and $387 million as of March 31, 2024 and December 31, 2023, respectively, of which $401 million and $385 million, respectively, was included in other long-term liabilities, with the remaining balances included in accrued liabilities.
Changes in the estimated fair value of our contingent consideration liabilities during Q1 2024 were as follows:
| In millions | |||||
| Balance as of December 31, 2023 | $ | 387 | |||
| Change in estimated fair value | 16 | ||||
| Balance as of March 31, 2024 | $ | 403 | |||
| 4. DEBT | ||
| In millions | March 31, 2024 | December 31, 2023 | |||||||||
| Principal amount of 2025 Term Notes outstanding | $ | 500 | $ | 500 | |||||||
| Principal amount of 2027 Term Notes outstanding | 500 | 500 | |||||||||
| Principal amount of 2031 Term Notes outstanding | 500 | 500 | |||||||||
| Unamortized discounts and debt issuance costs | (10) | (11) | |||||||||
Net carrying amount of term notes, non-current | $ | 1,490 | $ | 1,489 | |||||||
| Fair value of term notes outstanding (Level 2) | $ | 1,419 | $ | 1,440 | |||||||
Interest expense recognized on our term notes, which included amortization of debt discounts and issuance costs, was $18 million and $19 million in Q1 2024 and Q1 2023, respectively.
5.800% Term Notes due 2025 (2025 Term Notes) and 5.750% Term Notes due 2027 (2027 Term Notes)
In December 2022, we issued $500 million aggregate principal amount of 2025 Term Notes and $500 million aggregate principal amount of 2027 Term Notes. The 2025 Term Notes, which mature on December 12, 2025, and the 2027 Term Notes, which mature on December 13, 2027, accrue interest at a rate of 5.800% and 5.750% per
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annum, respectively, payable semi-annually. Interest for the 2025 Term Notes is payable on June 12 and December 12 of each year, beginning on June 12, 2023. Interest for the 2027 Term Notes is payable on June 13 and December 13 of each year, beginning on June 13, 2023.
We may redeem for cash all or any portion of the 2025 or 2027 Term Notes, at our option, at any time prior to maturity. Prior to November 12, 2025 for the 2025 Term Notes and prior to November 13, 2027 for the 2027 Term Notes, the notes are redeemable at make-whole premium redemption prices as defined in the applicable forms of note. After November 12, 2025 for the 2025 Term Notes and after November 13, 2027 for the 2027 Term Notes, the notes are redeemable at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus any accrued and unpaid interest up to, but excluding, the redemption date.
2.550% Term Notes due 2031 (2031 Term Notes)
In March 2021, we issued $500 million aggregate principal amount of 2031 Term Notes. The 2031 Term Notes, which mature on March 23, 2031, accrue interest at a rate of 2.550% per annum, payable semi-annually on March 23 and September 23 of each year. We may redeem for cash all or any portion of the 2031 Term Notes, at our option, at any time prior to maturity. Prior to December 23, 2030, the 2031 Term Notes are redeemable at make-whole premium redemption prices as defined in the applicable forms of note. After December 23, 2030, the notes are redeemable at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus any accrued and unpaid interest up to, but excluding, the redemption date.
Credit Agreement
On January 4, 2023, we entered into a new credit agreement (the Credit Agreement), which provides us with a $750 million senior unsecured -year revolving credit facility, including a $40 million sublimit for swingline borrowings and a $50 million sublimit for letters of credit (the Credit Facility). The proceeds of the loans under the Credit Facility may be used to finance working capital needs and for general corporate purposes.
The Credit Facility matures, and all amounts outstanding thereunder become due and payable in full, on January 4, 2028, subject to two -year extensions at our option, the consent of the extending lenders and certain other conditions. We may prepay amounts borrowed and terminate commitments under the Credit Facility at any time without premium or penalty. As of March 31, 2024, there were no borrowings or letters of credit outstanding under the Credit Facility, and we were in compliance with all financial and operating covenants.
Any loans under the Credit Facility will have a variable interest rate based on either the term secured overnight financing rate or the alternate base rate, plus an applicable rate that varies with the Company’s debt rating and, in the case of loans bearing interest based on the term secured overnight financing rate, a credit spread adjustment equal to 0.10% per annum. The Credit Agreement includes an option for us to elect to increase the commitments under the Credit Facility or to enter into one or more tranches of term loans in the aggregate principal amount of up to $250 million, subject to the consent of the lenders providing the additional commitments or term loans, as applicable, and certain other conditions.
The Credit Agreement contains financial and operating covenants. Pursuant to the Credit Agreement, we are required to maintain a ratio of total debt to adjusted annual earnings before interest, taxes, depreciation and amortization (EBITDA), calculated based on the four consecutive fiscal quarters ending with the most recent fiscal quarter, of not greater than 3.50 to 1.00 as of the end of each fiscal quarter. Upon the consummation of any Qualified Acquisition (as defined in the Credit Agreement) and us providing notice to the Administrative Agent, the ratio increases to 4.00 to 1.00 for the fiscal quarter in which the acquisition is consummated and the three consecutive fiscal quarters thereafter. The operating covenants include, among other things, limitations on (i) the incurrence of indebtedness by our subsidiaries, (ii) liens on our and our subsidiaries assets, and (iii) certain fundamental changes and the disposition of assets by us and our subsidiaries. The Credit Agreement contains other customary covenants, representations and warranties, and events of default.
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| 5. STOCKHOLDERS’ EQUITY | ||
Restricted Stock
Restricted stock activity was as follows:
| Restricted Stock Units (RSU) | Performance Stock Units (PSU)(1) | Weighted-Average Grant Date Fair Value per Share | |||||||||||||||||||||
| Units in thousands | RSU | PSU | |||||||||||||||||||||
| Outstanding at December 31, 2023 | 2,198 | — | $ | 236.32 | $ | — | |||||||||||||||||
| Awarded | 2,592 | 504 | $ | 134.71 | $ | 156.98 | |||||||||||||||||
| Vested | (17) | — | $ | 309.40 | $ | — | |||||||||||||||||
| Cancelled | (128) | (14) | $ | 223.88 | $ | 167.68 | |||||||||||||||||
| Outstanding at March 31, 2024 | 4,645 | 490 | $ | 179.69 | $ | 156.68 | |||||||||||||||||
_____________
(1)We issue three different PSU awards. We issue PSU for which the number of shares issuable is based on our performance relative to specified earnings per share targets (EPS PSU) and PSU with a market condition that vest based on the Company’s relative total shareholder return as compared to a peer group of companies (rTSR PSU). In Q1 2024, we began to issue PSU for which the number of shares issuable is based on our performance relative to specified operating margin targets (OM PSU). The number of units reflect the estimated number of shares to be issued at the end of the performance period. For rTSR PSU, the number of units reflect the estimated number of shares to be issued based on performance as of the current reporting period. Awarded units are presented net of performance adjustments.
Stock Options
Stock option activity was as follows:
| Units in thousands | Options | Weighted-Average Exercise Price | Performance Options(1) | Weighted-Average Exercise Price | |||||||||||||||||||
| Outstanding at December 31, 2023 | 35 | $ | 330.25 | 16 | $ | 87.74 | |||||||||||||||||
| Cancelled | (26) | $ | 330.25 | — | $ | — | |||||||||||||||||
| Outstanding at March 31, 2024 | 9 | $ | 330.25 | 16 | $ | 87.74 | |||||||||||||||||
| Exercisable at March 31, 2024 | 9 | $ | 330.25 | — | $ | — | |||||||||||||||||
_____________
(1)The number of units reflect awards that have been granted and for which it is assumed to be probable that the underlying performance goals will be achieved.
Liability-Classified Awards
We grant cash-based equity incentive awards to GRAIL employees. For purposes of valuation and performance measurement of the awards, GRAIL’s stand-alone value calculation, as estimated by GRAIL based on its analysis and on input from independent valuation advisors and analyses, is used. The awards generally have terms of four years and vest in equal installments on each anniversary of the grant date, subject to continued employment through the vesting period. These awards are accounted for as liability-classified awards.
Cash-based equity incentive award activity was as follows:
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| In millions | |||||
| Outstanding at December 31, 2023 | $ | 292 | |||
| Granted | 27 | ||||
| Vested and paid in cash | (43) | ||||
| Cancelled | (8) | ||||
| Change in fair value | 11 | ||||
| Outstanding at March 31, 2024 | $ | 279 | |||
Estimated liability as of March 31, 2024 (included in accrued liabilities) | $ | 41 | |||
We recognized share-based compensation expense of $29 million and $21 million in Q1 2024 and Q1 2023, respectively. As of March 31, 2024, approximately $238 million of total unrecognized compensation cost related to awards issued to date was expected to be recognized over a weighted-average period of approximately 2.4 years.
In connection with the acquisition of GRAIL, we assumed a performance-based award for which vesting is based on GRAIL’s future revenues. The award has an aggregate potential value of up to $78 million and expires, to the extent unvested, in August 2030. As of March 31, 2024, it was not probable that the performance conditions associated with the award will be achieved and, therefore, no share-based compensation expense, or corresponding liability, has been recognized in the condensed consolidated financial statements to-date.
Employee Stock Purchase Plan
The price at which common stock is purchased under the Employee Stock Purchase Plan (ESPP) is equal to 85% of the fair market value of the common stock on the first day of the offering period or purchase date, whichever is lower. During Q1 2024, approximately 0.3 million shares were issued under the ESPP. As of March 31, 2024, there were approximately 12.1 million shares available for issuance under the ESPP.
The assumptions used and the resulting estimate of weighted-average fair value per share for stock purchased under the ESPP during Q1 2024 were as follows:
| Risk-free interest rate | 4.66% - 5.54% | ||||
| Expected volatility | 45% - 49% | ||||
| Expected term | 0.5 - 1.1 year | ||||
| Expected dividends | 0 | % | |||
| Weighted-average grant-date fair value per share | $ | 44.95 | |||
Share Repurchases
We did not repurchase any shares during Q1 2024. As of March 31, 2024, authorizations to repurchase approximately $15 million of our common stock remained available under the $750 million share repurchase program authorized by our Board of Directors on February 5, 2020. The repurchases may be completed under a 10b5-1 plan or at management’s discretion.
Share-Based Compensation
Share-based compensation expense, which includes expense for both equity and liability-classified awards, reported in our condensed consolidated statements of operations was as follows:
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| In millions | Q1 2024 | Q1 2023 | |||||||||
| Cost of product revenue | $ | 5 | $ | 6 | |||||||
| Cost of service and other revenue | 2 | 1 | |||||||||
| Research and development | 39 | 38 | |||||||||
| Selling, general and administrative | 50 | 48 | |||||||||
| Share-based compensation expense, before taxes | 96 | 93 | |||||||||
| Related income tax benefits | (22) | (21) | |||||||||
| Share-based compensation expense, net of taxes | $ | 74 | $ | 72 | |||||||
As of March 31, 2024, approximately $834 million of total unrecognized compensation cost related to restricted stock, including RSU and PSU, stock options, including performance stock options, and ESPP shares issued to date was expected to be recognized over a weighted-average period of approximately 2.9 years.
| 6. SUPPLEMENTAL BALANCE SHEET DETAILS | ||
| In millions | March 31, 2024 | December 31, 2023 | |||||||||
| Trade accounts receivable, gross | $ | 644 | $ | 741 | |||||||
| Allowance for credit losses | (9) | (7) | |||||||||
| Total accounts receivable, net | $ | 635 | $ | 734 | |||||||
Inventory
| In millions | March 31, 2024 | December 31, 2023 | |||||||||
| Raw materials | $ | 262 | $ | 276 | |||||||
| Work in process | 405 | 402 | |||||||||
| Finished goods | 35 | 30 | |||||||||
| Inventory, gross | 702 | 708 | |||||||||
| Inventory reserve | (118) | (121) | |||||||||
| Total inventory, net | $ | 584 | $ | 587 | |||||||
Accrued Liabilities
| In millions | March 31, 2024 | December 31, 2023 | |||||||||
Legal contingencies(1) | $ | 478 | $ | 484 | |||||||
| Contract liabilities, current portion | 248 | 252 | |||||||||
Accrued compensation expenses(2) | 202 | 223 | |||||||||
| Accrued taxes payable | 67 | 79 | |||||||||
| 86 | 86 | ||||||||||
| Liability-classified equity incentive awards | 41 | 55 | |||||||||
Other, including warranties(3) | 151 | 146 | |||||||||
| Total accrued liabilities | $ | 1,273 | $ | 1,325 | |||||||
(2)Includes employee separation costs related to restructuring activities.
(3)See table below for changes in the reserve for product warranties.
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Changes in the reserve for product warranties were as follows:
| In millions | Q1 2024 | Q1 2023 | |||||||||
| Balance at beginning of period | $ | 21 | $ | 18 | |||||||
| Additions charged to cost of product revenue | 12 | 9 | |||||||||
| Repairs and replacements | (13) | (8) | |||||||||
| Balance at end of period | $ | 20 | $ | 19 | |||||||
We generally provide a one-year warranty on instruments. Additionally, we provide a warranty on consumables through the expiration date, which generally ranges from to twelve months after the manufacture date. At the time revenue is recognized, an accrual is established for estimated warranty expenses based on historical experience as well as anticipated product performance. We periodically review the warranty reserve for adequacy and adjust the warranty accrual, if necessary, based on actual experience and estimated costs to be incurred. Warranty expense is recorded as a component of cost of product revenue.
Restructuring
In Q2 2023, we implemented a cost reduction initiative that included workforce reductions, the consolidation of certain facilities and other actions to reduce expenses, all as part of a plan to realign operating expenses while maintaining focus on our innovation roadmap and sustainable long-term growth. In Q1 2024, we recorded restructuring charges primarily consisting of asset impairment charges related to our leased facilities.
A summary of the pre-tax restructuring charges are as follows:
| In millions | Q1 2024 | Cumulative charges recorded since inception | |||||||||
| Employee separation costs | $ | 4 | $ | 52 | |||||||
Asset impairment charges (1) | 32 | 132 | |||||||||
| Other costs | — | 4 | |||||||||
Total restructuring charges (2) | $ | 36 | $ | 188 | |||||||
_____________
(1)For Q1 2024, charges primarily relate to impairment of right-of-use assets and leasehold improvements for our Foster City campus. Cumulative charges recorded since inception also include impairment of right-of-use assets and leasehold improvements for our i3 campus.
(2)For Q1 2024, $35 million was recorded in SG&A expense and $1 million in R&D expense.
We recorded additional right-of-use asset impairments of $18 million in Q1 2024 related to our campus in Foster City, California and another property in San Diego, California. The impairments, which were recognized in selling, general and administrative expense, were determined by comparing the fair values of the impacted right-of-use assets to the carrying values of the assets as of the impairment measurement date. The fair values of the right-of-use assets were estimated using the discounted future cash flows method, which includes estimates and assumptions for future sublease rental rates that reflect current sublease market conditions, as well as discount rates. The estimates and assumptions used in our assessments represent Level 3 measurements because they are supported by little or no market activity and reflect our own assumptions in measuring fair value. We also recorded $14 million of leasehold improvement impairments related to our Foster City campus in Q1 2024, recognized in selling, general and administrative expense. We continue to evaluate our options with respect to the rest of our campus in Foster City, California and the other property in San Diego, California. As of March 31, 2024, we had remaining assets, consisting primarily of right-of-use assets and leasehold improvements, related to our Foster City campus and the other property in San Diego, California of approximately $142 million.
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A summary of the restructuring liability is as follows:
| In millions | Employee Separation Costs (1) | Other Costs | Total | ||||||||||||||
Amount recorded in accrued liabilities as of December 31, 2023 | $ | 17 | $ | 1 | $ | 18 | |||||||||||
Additional expense recorded | 4 | — | 4 | ||||||||||||||
Cash payments | (9) | (1) | (10) | ||||||||||||||
Adjustments to accrual | (2) | — | (2) | ||||||||||||||
Amount recorded in accrued liabilities as of March 31, 2024 | $ | 10 | $ | — | $ | 10 | |||||||||||
_____________
(1)It is expected that substantially all of the employee separation related restructuring charges will be paid by the end of Q2 2024.
Derivative Financial Instruments
We are exposed to foreign exchange rate risks in the normal course of business and use derivative financial instruments to partially offset this exposure. We do not use derivative financial instruments for speculative or trading purposes. Foreign exchange contracts are carried at fair value in other current assets, other assets, accrued liabilities, or other long-term liabilities, as appropriate, on the condensed consolidated balance sheets.
We use foreign exchange forward contracts to manage foreign currency risks related to monetary assets and liabilities denominated in currencies other than the U.S. dollar. These derivative financial instruments have terms of one month or less and are not designated as hedging instruments. Changes in fair value of these derivatives are recognized in other income (expense), net, along with the re-measurement gain or loss on the foreign currency denominated assets or liabilities. As of March 31, 2024, we had foreign exchange forward contracts in place to hedge exposures in the euro, Japanese yen, Australian dollar, Canadian dollar, Singapore dollar, Chinese Yuan Renminbi, and British pound. As of March 31, 2024 and December 31, 2023, the total notional amounts of outstanding forward contracts in place for these foreign currency purchases were $909 million and $926 million, respectively. In July 2023, we entered into forward contracts for a total notional amount of €432 million to hedge the foreign currency exposure for the fine imposed by the European Commission on July 12, 2023.
We also use foreign currency forward contracts to hedge portions of our foreign currency exposure associated with forecasted revenue transactions. These derivative financial instruments have terms up to 24 months and are designated as cash flow hedges. Changes in fair value of our cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) and are reclassified to revenue in the same period the underlying hedged transactions are recorded. We regularly review the effectiveness of our cash flow hedges and consider them to be ineffective if it becomes probable that the forecasted transactions will not occur in the identified period. Changes in fair value of the ineffective portions of our cash flow hedges, if any, are recognized in other income (expense), net. As of March 31, 2024, we had foreign currency forward contracts in place to hedge exposures associated with forecasted revenue transactions denominated in the euro, Japanese yen, Australian dollar, Canadian dollar, and Chinese Yuan Renminbi. As of March 31, 2024 and December 31, 2023, the total notional amounts of outstanding cash flow hedge contracts in place for these foreign currency purchases were $633 million and $628 million, respectively. We reclassified $3 million and $2 million to revenue in Q1 2024 and Q1 2023, respectively. As of March 31, 2024, the fair value of the foreign currency forward contracts was $14 million, recorded in total assets. As of December 31, 2023, the fair value of the foreign currency forward contracts recorded in total assets and total liabilities was $5 million and $9 million, respectively. The estimated gains reported in accumulated other comprehensive income (loss) that are expected to be reclassified into earnings within the next 12 months are $13 million as of March 31, 2024.
| 7. LEGAL PROCEEDINGS | ||
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unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. We regularly review outstanding legal matters to determine the adequacy of the liabilities accrued and related disclosures in consideration of many factors, which include, but are not limited to, past history, scientific and other evidence, and the specifics and status of each matter. We may change our estimates if our assessment of the various factors changes and the amount of ultimate loss may differ from our estimates, resulting in a material effect on our business, financial condition, results of operations, and/or cash flows.
Acquisition of GRAIL
Our acquisition of GRAIL remains subject to ongoing legal and regulatory proceedings in the United States and in the European Union.
On March 30, 2021, the U.S. Federal Trade Commission (the FTC) filed an administrative complaint and a motion for a preliminary injunction in the United States District Court for the District of Columbia. In both actions, the FTC alleged that our acquisition of GRAIL would violate Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18. We filed an answer to the FTC’s complaint in federal district court on April 6, 2021, and in the administrative court on April 13, 2021. On April 20, 2021, the United States District Court for the District of Columbia granted our motion to transfer venue to the United States District Court for the Southern District of California. On May 28, 2021, the district court granted the FTC’s motion to dismiss the complaint without prejudice. The administrative trial commenced on August 24, 2021. On September 1, 2022, the administrative law judge (the ALJ) ruled in favor of Illumina and found that the acquisition of GRAIL did not violate Section 7 of the Clayton Act. In the decision, the ALJ found that the FTC’s complaint counsel had failed to prove its prima facie case that Illumina’s acquisition of GRAIL would result in harm to competition in a putative market for multi-cancer early detection (MCED) tests. The FTC’s complaint counsel appealed the ALJ’s decision to the full FTC on September 2, 2022. The appeal was fully briefed as of November 10, 2022 and oral argument occurred on December 13, 2022. On March 31, 2023, the FTC issued an opinion and order (the FTC Order) requiring Illumina to divest GRAIL, reversing the ALJ’s ruling. On April 5, 2023, Illumina filed a petition for review of the FTC Order in the U.S. Court of Appeals for the Fifth Circuit. On April 24, 2023, the FTC granted a motion staying in its entirety the FTC Order pending resolution of Illumina’s Fifth Circuit appeal. The appeal was fully briefed as of August 16, 2023 and oral argument occurred on September 12, 2023. On December 15, 2023, the Fifth Circuit issued its opinion and order, in which the Court ruled that the Commission applied the incorrect standard in assessing Illumina’s open offer contract, and on that basis vacated the FTC Order and remanded the case to the Commission for reconsideration of the effects of the open offer contract under the proper standard as described in the Fifth Circuit’s decision, and in all other respects upheld the Commission’s decision.
On April 19, 2021, the European Commission accepted a request for a referral of the GRAIL acquisition for European Union merger review, submitted by a Member State of the European Union (France), and joined by several other EEA Member States (Belgium, Greece, Iceland, the Netherlands and Norway), under Article 22(1) of Council Regulation (EC) No 139/2004 (the EU Merger Regulation). The European Commission had never solicited referrals to take jurisdiction over an acquisition of a U.S. company that had no revenue in Europe. On April 28, 2021, we filed an action in the General Court of the European Union (the EU General Court) asking for annulment of the European Commission’s assertion of jurisdiction to review the acquisition under Article 22 of the EU Merger Regulation, as the acquisition does not meet the jurisdictional criteria under the EU Merger Regulation or under the national merger control laws of any Member State of the European Union. On July 13, 2022, the EU General Court reached a decision in favor of the European Commission, holding that the European Commission has jurisdiction under the EU Merger Regulation to review the acquisition. On September 22, 2022, we filed an appeal in the Court of Justice of the European Union (the EU Court of Justice) asking for annulment of the EU General Court’s judgment. On December 12, 2023, the EU Justice held a hearing on the appeal. On March 21, 2024, the Advocate General assigned to this case recommended, in a non-binding Opinion, that the EU Court of Justice annul the General Court’s judgment and the European Commission’s decisions accepting the referral of the GRAIL acquisition for EU merger review.
On October 29, 2021, the European Commission adopted an order imposing interim measures (the Initial Interim Measures Order). As the Initial Interim Measures Order was set to expire on November 3, 2022, the European Commission adopted a new order imposing interim measures (the New Interim Measures Order) on October 28, 2022. On December 1, 2021, we filed an action with the EU General Court asking for annulment of the Initial Interim Measures Order. The hearing of that application has been stayed pending our appeal of the judgment of the EU General Court regarding the European Commission’s assertion of jurisdiction. On January 10, 2023, we filed an
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action with the EU General Court asking for annulment of the New Interim Measures Order. On January 20, 2023, the European Commission requested that these proceedings be stayed pending our appeal on jurisdiction. We submitted a filing indicating that we had no objections to the European Commission’s request, and the EU General Court stayed the proceedings on February 21, 2023.
On September 6, 2022, the European Commission announced that it had completed its Phase II review of the acquisition of GRAIL and adopted a final decision (the Prohibition Decision), which found that, in its view, our acquisition of GRAIL was incompatible with the internal market in Europe because it results in a significant impediment to effective competition. On November 17, 2022, we filed an action with the EU General Court asking for annulment of the Prohibition Decision. The European Commission lodged its defense on April 20, 2023, and this was served on Illumina on May 23, 2023. Illumina filed its reply on August 31, 2023, and the Commission filed its rejoinder on December 22, 2023, which was served on Illumina on January 8, 2024. GRAIL has been granted leave to intervene.
On October 12, 2023, the European Commission adopted a decision requiring us to (among other things) divest GRAIL, and replacing the interim measures set forth in the New Interim Measures Order with substantially equivalent transitional measures (the EC Divestment Decision). On December 22, 2023, we filed an action with the EU General Court seeking an annulment of the EC Divestment Decision.
On July 12, 2023, the European Commission adopted a final decision finding that we breached the EU Merger Regulation by, in its view, acquiring the possibility to exert decisive influence over GRAIL and exerting such influence during the pendency of the European Commission’s review (the Article 14(2)(b) Decision). The European Commission therefore imposed a fine pursuant to Article 14(2)(b) of the EU Merger Regulation of approximately €432 million, representing the maximum fine of 10% of our consolidated annual revenues for fiscal year 2022. We provided guarantees in October 2023 to satisfy the obligation in lieu of cash payment while we appeal the European Commission’s jurisdictional decision and fine decision. The fine is accruing interest at a rate of 5.5% per annum, beginning in October 2023, while it is outstanding. As of March 31, 2024, we accrued $478 million, including related accrued interest and foreign currency fluctuations, included in accrued liabilities. We appealed the Article 14(2)(b) Decision on September 26, 2023. The European Commission lodged its defense on February 2, 2024. On March 7, 2024, the Court granted permission to the Council of the European Union to intervene in the case and submit its views as a non-party.
On December 17, 2023, we announced that we will divest GRAIL. On April 12, 2024, the European Commission issued a decision approving our divestment plan, which was submitted to the EC pursuant to the EC Divestment Decision.
SEC Inquiry Letter
In July 2023, we were informed that the staff of the SEC was conducting an investigation relating to Illumina and was requesting documents and communications primarily related to Illumina’s acquisition of GRAIL and certain statements and disclosures concerning GRAIL, its products and its acquisition, and related to the conduct and compensation of certain members of Illumina and GRAIL management, among other things. Illumina is cooperating with the SEC in this investigation.
Shareholder Derivative Complaints
On October 17, 2023, a stockholder derivative and class action complaint captioned Icahn Partners LP, et al. v. deSouza, et al., purportedly brought on behalf of Illumina and public holders of Illumina’s common stock, was filed in the Delaware Court of Chancery against certain current and former directors (including our former Chief Executive Officer). We are named as a nominal defendant in the complaint. The lawsuit alleges the named directors breached their fiduciary duties by knowingly causing Illumina to unlawfully close the GRAIL acquisition, concealing material facts related to the GRAIL acquisition and making inadequate disclosures. Before the filing of the complaint, the purported stockholders did not make a demand that our Board of Directors pursue the claims asserted therein. The complaint seeks damages, costs and expenses, including attorney fees, the certification and consolidation of a putative class, the issuance of amended disclosures, the removal of conflicted directors and declaratory and other
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equitable relief. Since the lawsuit is brought in part on behalf of Illumina as a nominal defendant, the alleged damages were allegedly suffered by us.
On November 1, 2023, the defendants filed a motion to dismiss the complaint, which has not yet been briefed. On the same day, Illumina—joined by the director defendants—moved to strike portions of the complaint that contain improperly included confidential and privileged information. On January 16, 2024, the Court granted the motion to strike. On December 5, 2023, the plaintiffs moved to expedite the proceedings with respect to their direct claims. The director defendants opposed that motion and Illumina joined their opposition. On January 19, 2024, the Court denied plaintiffs’ motion to expedite. On January 23, 2024, the plaintiffs filed a motion for reargument of the Court’s January 16 opinion, which the Court denied on February 19, 2024. On February 29, 2024, the plaintiffs filed an application to the trial court to certify the orders granting the motion to strike and denying the motion for reargument for interlocutory appeal. The Court refused the application on March 20, 2024. On March 14, 2024, the plaintiffs filed an application for interlocutory appeal with the Supreme Court of Delaware, which the Court denied on April 11, 2024.
On February 26, 2024, a stockholder derivative complaint captioned City of Omaha Police and Firefighters Retirement System v. deSouza, et al., purportedly brought on behalf of Illumina, was filed in the Delaware Court of Chancery against certain current and former directors. On April 16, 2024, a stockholder derivative complaint captioned City of Roseville General Employees Retirement System, et al. v. deSouza, et al., purportedly brought on behalf of Illumina, was filed in the Delaware Court of Chancery against certain current and former directors and officers. We are named as a nominal defendant in the complaints. The lawsuits allege the named directors and officers breached their fiduciary duties by knowingly causing Illumina to unlawfully close the GRAIL acquisition. The stockholders previously made requests to inspect certain books and records under Delaware law, and they purport to base their complaint in part on documents obtained from Illumina in response to those requests. Before the filing of the complaint, the purported stockholders did not make a demand that our Board of Directors pursue the claim asserted therein. The complaints seek damages, costs and expenses, including attorney fees and other equitable relief. Since the lawsuits are brought in part on behalf of Illumina as a nominal defendant, the alleged damages were allegedly suffered by us.
On March 26, 2024, the defendants filed a motion to dismiss the complaint in the lawsuit filed by City of Omaha Police and Firefighters Retirement System. The motion has not yet been briefed. The City of Roseville General Employees Retirement System lawsuit is in the early procedural stages.
On February 21, 2024, a stockholder derivative complaint captioned Elaine Wang, et al. v. deSouza, et al., purportedly brought on behalf of the Company was filed in the United States District Court for the District of Delaware (“District of Delaware”) against certain current and former directors. The Company is named as a nominal defendant in the complaint. The lawsuit alleges that the named directors breached their fiduciary duties by knowingly causing the Company to unlawfully close the GRAIL acquisition. Before the filing of the complaint, the purported stockholder did not make a demand that our Board of Directors pursue the asserted claims therein. The complaint seeks, among other things, restitution to the Company for the alleged damages caused by the named defendants. Since the lawsuit is brought in part on behalf of Illumina as a nominal defendant, the alleged damages were allegedly suffered by us.
On March 8, 2024, a stockholder derivative complaint captioned Michael Warner, et al. v. deSouza, et al., purportedly brought on behalf of Illumina was also filed in the United States District Court for the Southern District of California against certain current and former directors. We are named as a nominal defendant in the complaint. The lawsuit alleges that the named directors breached their fiduciary duties by knowingly causing us to unlawfully close the GRAIL acquisition. Before the filing of the complaint, the purported stockholder did not make a demand that our Board of Directors pursue the asserted claims therein. The complaint seeks, among other things, restitution to Illumina for the alleged damages caused by the named defendants. Since the lawsuit is brought in part on behalf of Illumina as a nominal defendant, the alleged damages were allegedly suffered by us. On March 28, 2024, the parties submitted a Joint Motion to Transfer the lawsuit to the District of Delaware, which the Court granted on March 29, 2024, and the Court transferred the lawsuit to the District of Delaware on the same day.
In light of the fact that these lawsuits are in an early stage, we cannot predict the ultimate outcome of the suits. We deny the allegations in the complaints and intend to vigorously defend the litigations.
Securities Class Actions
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Federal Securities Class Actions. On November 11, 2023, the first of three securities class action complaints was filed against Illumina and certain of its current and former executive officers in the United States District Court for the Southern District of California. The first-filed case is captioned Kangas v. Illumina, Inc. et al., the second-filed case is captioned Roy v. Illumina, Inc. et al., and the third-filed case is captioned Louisiana Sheriffs’ Pension & Relief Fund v. Illumina, Inc. et al. (collectively, the “Actions”). The complaints generally allege, among other things, that defendants made materially false and misleading statements and omitted material facts relating to Illumina’s acquisition of Grail. The complaints seek unspecified damages, interest, fees, and costs. On January 9, 2024, four movants filed motions to consolidate the Actions and to appoint a lead plaintiff (“Lead Plaintiff Motions”). On April 11, 2024, the Court issued an order consolidating the Actions into a single action (captioned in re Illumina, Inc. Securities Litigation No. 23-cv-2082-LL-MMP), and appointed Universal-Investment-Gesellschaft mbH, UI BVK Kapitalverwaltungsgesellschaft mbH, and ACATIS Investment Kapitalverwaltungsgesellschaft mbH as lead plaintiffs.
State Securities Class Actions. On February 2, 2024, the first of two additional securities class actions was filed against Illumina, certain of its officers and directors, and several other individuals and entities in the Superior Court of the State of California, County of San Mateo, captioned Loren Scott Mar v. Illumina, et al. and Scott Zerzanek v. Illumina, Inc. et al.. Both complaints generally allege, among other things, that defendants made materially false and misleading statements and omitted material facts in the November 2020 and February 2021 registration statements and prospectus relating to Illumina’s acquisition of Grail. The complaints seek unspecified damages, interest, fees, and costs. On March 29, 2024, the parties to the actions filed a Joint Stipulation to Consolidate the actions and to appoint co-lead counsel for plaintiffs, which the Court granted on April 5, 2024. A case management conference has been scheduled for May 6, 2024.
In light of the fact that the lawsuits are in an early stage, we cannot predict the ultimate outcome of the suits. We deny the allegations in the complaints and intend to vigorously defend the litigation.
DOJ Civil Investigative Demand
On January 18, 2024, we received a civil investigative demand (CID) from the U.S. Department of Justice, requiring production of certain documents and information in the course of a False Claims Act investigation to determine whether there is or has been a violation of 31 U.S.C. § 3729. The False Claims Act investigation concerns allegations that the Company caused the submission of false claims to Medicare and other federal government programs because it misrepresented its compliance with cybersecurity requirements to the Food and Drug Administration and other federal agencies that purchase its devices. The Company is preparing its response and cooperating with the government.
Books and Records Action
On February 14, 2024, a stockholder filed a complaint in the Delaware Court of Chancery captioned Pavers and Road Builders Benefit Funds v. Illumina, Inc. seeking to inspect certain books and records related to the GRAIL transaction, including certain materials and minutes from meetings of our Board of Directors, which have been withheld because the Company contends they are non-responsive to the request or subject to the attorney-client privilege. Illumina previously provided documents to the stockholder in response to a demand made by letter under Delaware law, but the stockholder seeks additional and unredacted materials through this action. On March 11, 2024, Illumina filed an answer to the complaint, denying that the stockholder was entitled to inspection. In light of the fact that the lawsuit is in an early stage, we cannot predict the ultimate outcome of the suit. We deny that the stockholder is entitled to review the documents and intend to vigorously defend the litigation. A trial is scheduled for June 7, 2024.
| 8. INCOME TAXES | ||
Our effective tax rate for Q1 2024 was (15.3)% compared to 103.9% in Q1 2023. The variance from the U.S. federal statutory tax rate of 21% in Q1 2024 was primarily attributable to the $21 million income tax expense impact of research and development expense capitalization for tax purposes, and the $18 million income tax expense impact of GRAIL pre-acquisition net operating losses on global intangible low-taxed income (GILTI), the utilization of U.S.
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foreign tax credits, and the Pillar Two global minimum top-up tax. This was partially offset by the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore.
Other than in Q2 2023, we historically calculated the provision/(benefit) for income taxes for interim periods utilizing an estimated annual effective tax rate applied to the income/(loss) for the reporting period. In accordance with the authoritative guidance for accounting for income taxes in interim periods, we concluded for Q1 2024 that it was appropriate to determine the provision for income taxes utilizing the year-to-date effective tax rate method. Since minor changes in the estimated income/(loss) before income taxes would result in significant changes in the estimated annual effective tax rate, we determined the year-to-date effective tax rate method would provide a more reliable estimate of the provision for income taxes for Q1 2024.
As of March 31, 2024 and December 31, 2023, prepaid income taxes, included within prepaid expenses and other current assets on the condensed consolidated balance sheets, were $64 million and $75 million, respectively.
| 9. SEGMENT INFORMATION | ||
Core Illumina: Core Illumina’s products and services serve customers in the research, clinical and applied markets, and enable the adoption of a variety of genomic solutions. Core Illumina includes all of our operations, excluding the results of GRAIL.
GRAIL: GRAIL is a healthcare company focused on early detection of multiple cancers.
| In millions | Q1 2024 | Q1 2023 | |||||||||
| Revenue: | |||||||||||
| Core Illumina | $ | 1,056 | $ | 1,076 | |||||||
| GRAIL | 27 | 20 | |||||||||
| Eliminations | (7) | (9) | |||||||||
| Consolidated revenue | $ | 1,076 | $ | 1,087 | |||||||
| Income (loss) from operations: | |||||||||||
| Core Illumina | $ | 116 | $ | 142 | |||||||
| GRAIL | (227) | (204) | |||||||||
| Eliminations | — | (2) | |||||||||
| Consolidated loss from operations | $ | (111) | $ | (64) | |||||||
Total other income (expense), net primarily relates to Core Illumina, and we do not allocate income taxes to our segments.
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| MANAGEMENT’S DISCUSSION & ANALYSIS | ||
•Management’s Overview and Outlook. High level discussion of our operating results and significant known trends that affect our business.
•Results of Operations. Detailed discussion of our revenues and expenses.
•Liquidity and Capital Resources. Discussion of key aspects of our condensed consolidated statements of cash flows, changes in our financial position, and our financial commitments.
•Critical Accounting Policies and Estimates. Discussion of significant changes since our most recent Annual Report on Form 10-K that we believe are important to understanding the assumptions and judgments underlying our condensed consolidated financial statements.
•Recent Accounting Pronouncements. Summary of recent accounting pronouncements applicable to our condensed consolidated financial statements.
•Quantitative and Qualitative Disclosure About Market Risk. Discussion of our financial instruments’ exposure to market risk.
Our discussion of our results of operations, financial condition, and cash flow for Q1 2023 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” within our filing of Form 10-Q for the fiscal quarter ended April 2, 2023.
This MD&A discussion contains forward-looking statements that involve risks and uncertainties. See “Consideration Regarding Forward-Looking Statements” preceding the Condensed Consolidated Financial Statements section of this report for additional factors relating to such statements. This MD&A should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in this report and our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Operating results are not necessarily indicative of results that may occur in future periods.
MANAGEMENT’S OVERVIEW AND OUTLOOK
This overview and outlook provide a high-level discussion of our operating results and significant known trends that affect our business. We believe that an understanding of these trends is important to understanding our financial results for the periods being reported herein as well as our future financial performance. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this report.
About Illumina
Our focus on innovation has established us as a global leader in DNA sequencing and array-based technologies, serving customers in the research, clinical and applied markets. Our products are used for applications in the life sciences, oncology, reproductive health, agriculture and other emerging segments. Our customers include leading genomic research centers, academic institutions, government laboratories, and hospitals, as well as pharmaceutical, biotechnology, commercial molecular diagnostic laboratories, and consumer genomics companies. Our comprehensive line of products addresses the scale of experimentation and breadth of functional analysis to advance disease research, drug development, and the development of molecular tests. This portfolio of leading-edge sequencing and array-based solutions addresses a range of genomic complexity and throughput, enabling researchers and clinical practitioners to select the best solution for their scientific challenge.
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On August 18, 2021, we acquired GRAIL, a healthcare company focused on early detection of multiple cancers. GRAIL’s Galleri blood test detects various types of cancers before they are symptomatic. The acquisition is subject to ongoing legal proceedings and, currently, GRAIL must be held and operated separately and independently from Illumina pursuant to the transitional measures ordered by the European Commission in the EC Divestment Decision, following the prohibition of our acquisition of GRAIL on September 6, 2022. On December 17, 2023, we announced that we will divest GRAIL, and on April 12, 2024, the European Commission formally approved our divestment plan with respect to GRAIL, which had been submitted pursuant to the EC Divestment Decision. See note “7. Legal Proceedings” for further details. The divestiture of GRAIL is expected to be executed through a third-party sale or capital markets transaction in accordance with the EC Divestment Decision, with the goal of finalizing the terms of the divestiture by the end of the second quarter of 2024. There can be no assurance regarding the ultimate timing of the divestiture of GRAIL.
We have two reportable segments, Core Illumina and GRAIL. Core Illumina relates to our core operations, excluding the results of GRAIL. See note “9. Segment Information” for additional details.
Our financial results have been, and will continue to be, impacted by several significant trends, which are described below. While these trends are important to understanding and evaluating our financial results, this discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto within the Condensed Consolidated Financial Statements section of this report, and the other transactions, events, and trends discussed in “Risk Factors” within the Other Key Information section of this report.
Financial Overview
Since 2023, macroeconomic factors such as inflation, exchange rate fluctuations and concerns about an economic downturn, competitive challenges in our China region, and the sanctions imposed on Russia as a result of the armed conflict between Russia and Ukraine have impacted both Illumina directly and our customers’ behavior. For example, some customers experienced supply chain pressures that delayed their lab expansions and others are managing inventory and capital more conservatively. We expect these factors to continue to impact our sales and results of operations in 2024, the size and duration of which is significantly uncertain.
Financial highlights for Q1 2024 included the following:
•Revenue decreased 1% in Q1 2024 to $1,076 million compared to $1,087 million in Q1 2023 primarily due to a decrease in sequencing instruments revenue, driven by fewer shipments of our high-throughput and mid-throughout instruments, partially offset by an increase in service and other revenue.
•Gross profit as a percentage of revenue (gross margin) was 62.0% in Q1 2024 compared to 60.3% in Q1 2023. The increase in gross margin was driven primarily by a more favorable mix of sequencing consumables and execution of our operational excellence priorities that delivered cost savings, including freight, and improved productivity. This was partially offset by certain strategic partnership revenue that is lower margin and increased warranty and field service costs. Our gross margin depends on many factors, including: market conditions that may impact our pricing; sales mix changes among consumables, instruments, services, and development and licensing revenue; product mix changes between established products and new products; excess and obsolete inventories; royalties; our cost structure for manufacturing operations relative to volume; freight costs; and product support obligations.
•Loss from operations was $(111) million in Q1 2024 compared to $(64) million in Q1 2023. The increase in loss from operations was due to an increase in operating expense of $59 million, which included restructuring charges of $36 million, partially offset by a $12 million increase in gross profit. We continue to focus on our cost reduction initiatives to accelerate progress toward higher margins and create flexibility for further investment in high-growth areas.
•Our effective tax rate was (15.3)% in Q1 2024 compared to 103.9% in Q1 2023. The variance from the U.S. federal statutory tax rate of 21% was primarily because of the income tax expense impact of research and development expense capitalization for tax purposes, and the income tax expense impact of GRAIL pre-acquisition net operating losses on GILTI, the utilization of U.S. foreign tax credits, and the Pillar Two global minimum top-up tax. This was partially offset by the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore.
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•We ended Q1 2024 with cash, cash equivalents, and short-term investments totaling $1,115 million, of which approximately $614 million was held by our foreign subsidiaries.
RESULTS OF OPERATIONS
To enhance comparability, the following table sets forth unaudited condensed consolidated statement of operations data for the specified reporting periods, stated as a percentage of total revenue.(1)
| Q1 2024 | Q1 2023 | ||||||||||
| Revenue: | |||||||||||
| Product revenue | 81.4 | % | 84.8 | % | |||||||
| Service and other revenue | 18.6 | 15.2 | |||||||||
| Total revenue | 100.0 | 100.0 | |||||||||
| Cost of revenue: | |||||||||||
| Cost of product revenue | 23.6 | 26.2 | |||||||||
| Cost of service and other revenue | 9.9 | 9.1 | |||||||||
| Amortization of acquired intangible assets | 4.5 | 4.4 | |||||||||
| Total cost of revenue | 38.0 | 39.7 | |||||||||
| Gross profit | 62.0 | 60.3 | |||||||||
| Operating expense: | |||||||||||
| Research and development | 31.5 | 31.4 | |||||||||
| Selling, general and administrative | 40.8 | 34.8 | |||||||||
| Total operating expense | 72.3 | 66.1 | |||||||||
| Loss from operations | (10.3) | (5.7) | |||||||||
| Other income (expense): | |||||||||||
| Interest income | 1.1 | 1.6 | |||||||||
| Interest expense | (1.7) | (1.8) | |||||||||
| Other income (expense), net | 0.8 | (1.0) | |||||||||
| Total other income (expense), net | 0.2 | (1.3) | |||||||||
| Loss before income taxes | (10.1) | (7.1) | |||||||||
| Provision (benefit) for income taxes | 1.6 | (7.5) | |||||||||
| Net (loss) income | (11.7) | % | 0.4 | % | |||||||
_____________
(1)Percentages may not recalculate due to rounding.
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Revenue
| Dollars in millions | Q1 2024 | Q1 2023 | Change | % Change | |||||||||||||||||||
| Core Illumina: | |||||||||||||||||||||||
| Consumables | $ | 769 | $ | 770 | $ | (1) | — | % | |||||||||||||||
| Instruments | 114 | 160 | (46) | (29) | |||||||||||||||||||
| Total product revenue | 883 | 930 | (47) | (5) | |||||||||||||||||||
| Service and other revenue | 173 | 146 | 27 | 18 | |||||||||||||||||||
| Total Core Illumina revenue | 1,056 | 1,076 | (20) | (2) | |||||||||||||||||||
| GRAIL: | |||||||||||||||||||||||
| Service and other revenue | 27 | 20 | 7 | 35 | |||||||||||||||||||
| Eliminations | (7) | (9) | 2 | (22) | |||||||||||||||||||
| Total consolidated revenue | $ | 1,076 | $ | 1,087 | $ | (11) | (1) | % | |||||||||||||||
The slight decrease in Core Illumina consumables revenue in Q1 2024 was driven primarily by a decrease in microarray consumables, partially offset by an increase in sequencing consumables. Core Illumina instruments revenue decreased in Q1 2024, primarily due to a decrease in sequencing instruments revenue of $44 million, driven by fewer shipments of our high-throughput instruments, given we entered 2024 with a lower backlog of NovaSeq X instruments, as compared to 2023, given significant pre-orders following the launch, and fewer shipments of our mid-throughput instruments, primarily as capital and cash flow constraints continue to impact our customer’s purchasing behavior. Core Illumina service and other revenue increased in Q1 2024 primarily due to increased revenue from our strategic partnerships.
GRAIL service and other revenue increased $7 million, or 35%, in Q1 2024 primarily due to sales of Galleri.
Gross Margin
| Dollars in millions | Q1 2024 | Q1 2023 | Change | % Change | |||||||||||||||||||
| Gross profit (loss): | |||||||||||||||||||||||
| Core Illumina | $ | 693 | $ | 687 | $ | 6 | 1 | % | |||||||||||||||
| GRAIL | (22) | (25) | 3 | (12) | |||||||||||||||||||
| Eliminations | (4) | (7) | 3 | (43) | |||||||||||||||||||
| Consolidated gross profit | $ | 667 | $ | 655 | $ | 12 | 2 | % | |||||||||||||||
| Gross margin: | |||||||||||||||||||||||
| Core Illumina | 65.7 | % | 63.8 | % | |||||||||||||||||||
| GRAIL | * | * | |||||||||||||||||||||
| Consolidated gross margin | 62.0 | % | 60.3 | % | |||||||||||||||||||
________________
*Not meaningful.
The increase in Core Illumina gross margin in Q1 2024 was driven primarily by a more favorable mix of sequencing consumables and execution of our operational excellence priorities that delivered cost savings, including freight, and improved productivity. This was partially offset by certain strategic partnership revenue that is lower margin and increased warranty and field service costs.
GRAIL gross loss in Q1 2024 and Q1 2023 was primarily due to amortization of intangible assets of $34 million.
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Operating Expense
| Dollars in millions | Q1 2024 | Q1 2023 | Change | % Change | |||||||||||||||||||
| Research and development: | |||||||||||||||||||||||
| Core Illumina | $ | 241 | $ | 259 | $ | (18) | (7) | % | |||||||||||||||
| GRAIL | 101 | 86 | 15 | 17 | |||||||||||||||||||
| Eliminations | (3) | (4) | 1 | (25) | |||||||||||||||||||
| Consolidated research and development | 339 | 341 | (2) | (1) | |||||||||||||||||||
| Selling, general and administrative: | |||||||||||||||||||||||
| Core Illumina | 336 | 286 | 50 | 17 | |||||||||||||||||||
| GRAIL | 104 | 93 | 11 | 12 | |||||||||||||||||||
| Eliminations | (1) | (1) | — | — | |||||||||||||||||||
| Consolidated selling, general and administrative | 439 | 378 | 61 | 16 | |||||||||||||||||||
| Total consolidated operating expense | $ | 778 | $ | 719 | $ | 59 | 8 | % | |||||||||||||||
Core Illumina R&D expense decreased by $18 million, or 7%, in Q1 2024 primarily due to a decrease in headcount and employee related compensation costs, as well as a decrease in lab supply costs, as we continue to focus on our cost reduction initiatives in 2024. The decrease was partially offset by impairment of an IPR&D intangible asset.
GRAIL R&D expense increased by $15 million, or 17%, in Q1 2024 primarily due to an increase in headcount and employee related compensation costs and an increase in lab and consumables spend.
Core Illumina SG&A expense increased by $50 million, or 17%, in Q1 2024 primarily due to an increase in restructuring charges of $33 million, which consisted primarily of lease and other asset impairments, a loss recognized on our contingent consideration liability related to the GRAIL CVRs of $17 million, and accrued interest recognized on the fine imposed by the European Commission of $7 million (interest began accruing on the fine in October 2023). The increase was partially offset by a decrease in facility related costs, as we continue to exit certain of our facilities, and a decrease in headcount and employee related compensation costs.
GRAIL SG&A expense increased by $11 million, or 12%, in Q1 2024 primarily due to an increase in headcount and employee related compensation costs and a slight increase in professional services.
Other Income (Expense)
| Dollars in millions | Q1 2024 | Q1 2023 | Change | % Change | |||||||||||||||||||
| Interest income | $ | 12 | $ | 17 | $ | (5) | (29) | % | |||||||||||||||
| Interest expense | (18) | (20) | 2 | (10) | |||||||||||||||||||
| Other income (expense), net | 8 | (11) | 19 | (173) | |||||||||||||||||||
| Total other income (expense), net | $ | 2 | $ | (14) | $ | 16 | (114) | % | |||||||||||||||
Total other income (expense), net primarily relates to the Core Illumina segment.
Interest income consisted primarily of interest on our money market funds, which decreased primarily due to a lower cash balance in Q1 2024 as compared to the prior year. Interest expense consisted primarily of interest on our outstanding Term Notes. The fluctuation in other income (expense), net in Q1 2024 was primarily driven by a favorable impact related to our strategic investments. We recognized a net gain of $5 million in Q1 2024 compared to a net loss of $16 million in Q1 2023.
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Provision (Benefit) for Income Taxes
| Dollars in millions | Q1 2024 | Q1 2023 | Change | % Change | |||||||||||||||||||
| Loss before income taxes | $ | (109) | $ | (78) | $ | (31) | 40 | % | |||||||||||||||
| Provision (benefit) for income taxes | 17 | (81) | 98 | (121) | |||||||||||||||||||
| Net (loss) income | $ | (126) | $ | 3 | $ | (129) | (4,300) | % | |||||||||||||||
| Effective tax rate | (15.3) | % | 103.9 | % | |||||||||||||||||||
Our effective tax rate was (15.3)% in Q1 2024, compared to 103.9% in Q1 2023. The variance from the U.S. federal statutory tax rate of 21% for Q1 2024 was primarily because of the $21 million income tax expense impact of capitalizing research and development expenses for tax purposes, and the $18 million income tax expense impact of GRAIL pre-acquisition net operating losses on GILTI, the utilization of U.S. foreign tax credits, and the Pillar Two global minimum top-up tax. The income tax expense in Q1 2024 was also favorably impacted by the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore.
In Q1 2023, the variance from the U.S. federal statutory tax rate of 21% was primarily because of the $49 million income tax expense impact of capitalizing research and development expenses for tax purposes, and the $44 million income tax expense impact of GRAIL pre-acquisition net operating losses on GILTI and the utilization of U.S. foreign tax credits. The tax benefit in Q1 2023 was also favorably impacted by the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore and the United Kingdom.
Other than in Q2 2023, we historically calculated the provision/(benefit) for income taxes for interim periods utilizing an estimated annual effective tax rate applied to the income/(loss) for the reporting period. In accordance with the authoritative guidance for accounting for income taxes in interim periods, we concluded for Q1 2024 that it was appropriate to determine the provision for income taxes utilizing the year-to-date effective tax rate method. Since minor changes in the estimated income/(loss) before income taxes would result in significant changes in the estimated annual effective tax rate, we determined the year-to-date effective tax rate method would provide a more reliable estimate of the provision for income taxes for Q1 2024.
Our future effective tax rate may vary from the U.S. federal statutory tax rate due to the mix of earnings in tax jurisdictions with different statutory tax rates and the other factors discussed in the risk factor “We are subject to risks related to taxation in multiple jurisdictions” described in “Risk Factors” within the Business & Market Information section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2024, we had approximately $1,108 million in cash and cash equivalents, of which approximately $614 million was held by our foreign subsidiaries. Cash and cash equivalents increased by $60 million from December 31, 2023 due to the factors described in the “Cash Flow Summary” below. Our primary source of liquidity, other than our holdings of cash, cash equivalents, and investments, has been cash flows from operations and, from time to time, issuances of debt. Our ability to generate cash from operations provides us with the financial flexibility we need to meet operating, investing, and financing needs. Historically, we have liquidated our short-term investments and/or issued debt to finance our business needs as a supplement to cash provided by operating activities. As of March 31, 2024, we had $7 million remaining in short-term investments, comprised of marketable equity securities, which are included in prepaid expenses and other current assets.
On July 12, 2023, as a result of our decision to proceed with the completion of our acquisition of GRAIL during the pendency of the European Commission’s review, the European Commission imposed a €432 million fine on us, representing the maximum fine of 10% of our consolidated annual revenues for fiscal year 2022. As of March 31, 2024, we accrued $478 million, including related accrued interest and foreign currency fluctuations, included in accrued liabilities. We provided guarantees in October 2023 to satisfy the obligation in lieu of cash payment while we appeal the European Commission’s jurisdictional decision and fine decision. The fine is accruing interest at a rate of 5.5% per annum, beginning in October 2023, while it is outstanding. Refer to note “7. Legal Proceedings” for additional details.
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In December 2022, we issued term notes due 2025 with an aggregate principal amount of $500 million and term notes due 2027 with an aggregate principal amount of $500 million. The 2025 Term Notes, which mature on December 12, 2025, and the 2027 Term Notes, which mature on December 13, 2027, accrue interest at a rate of 5.800% and 5.750% per annum, respectively, payable semi-annually in June and December of each year. We may redeem for cash all or any portion of the 2025 or 2027 Term Notes, at our option, at any time prior to maturity.
In March 2021, we issued term notes due 2031 with an aggregate principal amount of $500 million. The 2031 Term Notes, which mature on March 23, 2031, accrue interest at a rate of 2.550% per annum, payable semi-annually in March and September of each year. We may redeem for cash all or any portion of the 2031 Term Notes, at our option, at any time prior to maturity.
On January 4, 2023, we obtained a new Credit Facility, which provides us with a $750 million senior unsecured five year revolving credit facility, including a $40 million sublimit for swingline borrowings and a $50 million sublimit for letters of credit. The Credit Facility matures, and all amounts outstanding thereunder become due and payable in full, on January 4, 2028, subject to two one-year extensions at our option and the consent of the extending lenders and certain other conditions. As of March 31, 2024, there were no borrowings outstanding under the Credit Facility; however, we may draw upon the facility in the future to manage cash flow or for other corporate purposes, including in connection with the payment of the €432 million European Commission fine. We provided guarantees in October 2023 to satisfy the obligation in lieu of cash payment while we appeal the European Commission’s jurisdictional decision and fine decision.
As of March 31, 2024, the fair value of our contingent consideration liability related to our acquisition of GRAIL was $403 million, of which $401 million was included in other long-term liabilities. The contingent value rights issued as part of the acquisition entitle the holders to receive future cash payments on a quarterly basis (Covered Revenue Payments) representing a pro rata portion of certain GRAIL-related revenues (Covered Revenues) each year for a 12-year period. This will reflect a 2.5% payment right to the first $1 billion of revenue each year for 12 years. Revenue above $1 billion each year will be subject to a 9% contingent payment right during this same period. We expect Covered Revenues for Q1 2024 to be approximately $27 million and for related Covered Revenue Payments to total approximately $250,000 in Q2 2024. In Q1 2024, we paid $284,000 in aggregate Covered Revenue Payments related to Covered Revenues for Q4 2023 of $30 million.
We grant cash incentive equity awards to GRAIL employees that generally have terms of four years and vest in equal annual installments. As of March 31, 2024, the aggregate cash value of awards outstanding and unvested was $279 million, and we accrued an estimated liability of $41 million, included in accrued liabilities. In addition, we have an outstanding performance-based award for which vesting is based on GRAIL’s future revenues. The award has an aggregate potential value of up to $78 million, which is expected to be settled in cash, and expires, to the extent unvested, in August 2030. As of March 31, 2024, it was not probable that the performance conditions associated with the award will be achieved.
We had $4 million (plus recallable distributions of approximately $10 million) and up to $59 million, respectively, remaining in our capital commitments to two venture capital investment funds as of March 31, 2024 that are callable through April 2026 and July 2029, respectively.
Authorizations to repurchase $15 million of our common stock remained available as of March 31, 2024 under the $750 million share repurchase program authorized by our Board of Directors on February 5, 2020. The repurchases may be completed under a 10b5-1 plan or at management’s discretion. We do not intend to make any share repurchases during fiscal year 2024.
We anticipate that our current cash, cash equivalents, and short-term investments, together with cash provided by operating activities and available borrowing capacity under the Credit Facility, are sufficient to fund our near-term capital and operating needs for at least the next 12 months. Operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. Our primary short-term needs for capital, which are subject to change, include:
•support of commercialization efforts related to our current and future products;
•acquisitions of equipment and other fixed assets for use in our current and future manufacturing and research and development facilities;
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•the continued advancement of research and development efforts;
•the payment of the European Commission fine related to our acquisition of GRAIL;
•the requirement to ensure that GRAIL has access to sufficient funds, at the time of a divestment, to cover at least 2.5 years of operations according to its latest long-range plan per the EC Divestment Decision. We expect the amount of such funding will be approximately $1 billion, which includes cash from GRAIL’s balance sheet;
•potential strategic acquisitions and investments;
•repayment of debt obligations; and
•the evolving needs of our facilities, including costs of leasing and building out facilities.
We expect that our revenue and results of operations, as well as the status of each of our new product development programs, will significantly impact our cash management decisions.
Our future capital requirements and the adequacy of our available funds will depend on many factors, including:
•our ability to successfully commercialize and further develop our technologies and create innovative products in our markets;
•scientific progress in our research and development programs and the magnitude of those programs;
•competing technological and market developments; and
•the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or complement our product and service offerings.
Cash Flow Summary
| In millions | Q1 2024 | Q1 2023 | |||||||||
| Net cash provided by operating activities | $ | 77 | $ | 10 | |||||||
| Net cash used in investing activities | (48) | (56) | |||||||||
| Net cash provided by (used in) financing activities | 35 | (473) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (4) | 2 | |||||||||
| Net increase (decrease) in cash and cash equivalents | $ | 60 | $ | (517) | |||||||
Operating Activities
Net cash provided by operating activities in Q1 2024 consisted of a net loss of $126 million, plus net adjustments of $229 million, less net changes in operating assets and liabilities of $26 million. The primary adjustments to net loss included depreciation and amortization expense of $108 million, share-based compensation expense of $96 million, property and equipment and right-of-use asset impairment of $32 million, and change in fair value of contingent consideration liabilities of $16 million, partially offset by deferred income taxes of $24 million. Cash flow impact from changes in net operating assets and liabilities were primarily driven by decreases in accrued liabilities and accounts payable and an increase in prepaid expenses and other current assets, partially offset by a decrease in accounts receivable.
Investing Activities
Net cash used in investing activities totaled $48 million in Q1 2024. We invested $36 million in capital expenditures, primarily associated with our investment in facilities, and had purchases of strategic investments of $12 million.
Financing Activities
Net cash provided by financing activities totaled $35 million in Q1 2024. We received $36 million in proceeds from the sale of shares under our employee stock purchase plan.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing our condensed consolidated financial statements, we make estimates, assumptions and judgments that can have a significant impact on our net revenue, operating income (loss) and net income (loss), as well as on the value of certain assets and liabilities on our balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described in “Critical Accounting Policies and Estimates” within the Management’s Discussion & Analysis section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. Though macroeconomic factors such as inflation, exchange rate fluctuations and concerns about an economic downturn present additional uncertainty, we continue to use the best information available to inform our critical accounting estimates. There were no material changes to our critical accounting policies and estimates during Q1 2024, with the exception of income taxes as disclosed in note “1. Organization and Significant Accounting Policies.”
RECENT ACCOUNTING PRONOUNCEMENTS
For a summary of recent accounting pronouncements applicable to our condensed consolidated financial statements, see note “1. Organization and Significant Accounting Policies” within the Condensed Consolidated Financial Statements section of this report, which is incorporated herein by reference.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There were no substantial changes to our market risks in Q1 2024, when compared to the disclosures in “Quantitative and Qualitative Disclosures about Market Risk” within the Management’s Discussion & Analysis section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
| OTHER KEY INFORMATION | ||
We design our internal controls to provide reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported in conformity with U.S. generally accepted accounting principles. We also maintain internal controls and procedures to ensure that we comply with applicable laws and our established financial policies.
During the first quarter of 2024, we continued to monitor and evaluate the design and operating effectiveness of key controls. There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that materially affected or are reasonably likely to materially affect internal control over financial reporting.
Based on management’s evaluation (under the supervision and with the participation of our chief executive officer (CEO) and chief financial officer (CFO)), as of the end of the period covered by this report, our CEO and CFO concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
LEGAL PROCEEDINGS
See discussion of legal proceedings in note “7. Legal Proceedings” in the Condensed Consolidated Financial Statements section of this report, which is incorporated herein by reference.
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RISK FACTORS
Our business is subject to various risks, including those described in “Risk Factors” within the Business & Market Information section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. In addition to the risk factors disclosed in our Form 10-K, the issues raised in the following risk factor could adversely affect our operating results and stock price:
Our acquisition of GRAIL remains subject to ongoing legal and regulatory proceedings in the United States and in the European Union. On December 17, 2023, we announced that we will divest GRAIL. Adverse decisions by the EU and/or U.S. courts, the European Commission, the FTC and/or other governmental or regulatory authorities, that have been issued in the past or may be issued in the future, and/or other adverse consequences resulting from our decision to proceed with the completion of the acquisition, have resulted in significant financial penalties, operational restrictions and increased costs, and could result in similar additional future consequences or further result in loss of revenues, implicate our existing contractual arrangements or require us to divest all or a portion of the assets or equity interests of GRAIL on terms that are materially worse than the terms on which we acquired GRAIL, any or all of which, individually or in the aggregate, could have a material adverse effect on our business, financial condition and results of operation.
As previously disclosed, on March 30, 2021, the FTC filed an administrative complaint alleging that our acquisition of GRAIL (the Acquisition) would violate Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18. On September 1, 2022, the administrative law judge (the ALJ) ruled in favor of Illumina and found that the acquisition of GRAIL did not violate Section 7 of the Clayton Act. The FTC’s complaint counsel appealed the ALJ’s decision to the full FTC on September 2, 2022. On March 31, 2023, the FTC issued an opinion and order (the FTC Order) requiring Illumina to divest GRAIL, reversing the ALJ’s ruling. On April 5, 2023, Illumina filed a petition for review of the FTC Order in the U.S. Court of Appeals for the Fifth Circuit. On April 24, 2023, the FTC granted a motion staying in its entirety the FTC Order pending resolution of Illumina’s Fifth Circuit appeal. On December 15, 2023, the Fifth Circuit issued its opinion and order, in which the Court ruled that the Commission applied the incorrect standard in assessing Illumina’s open offer contract, and on that basis vacated the FTC Order and remanded the case to the Commission for reconsideration of the effects of the open offer contract under the proper standard as described in the Fifth Circuit’s decision, and in all other respects upheld the Commission’s decision.
As previously disclosed, on April 19, 2021, the European Commission accepted a request for referral of the Acquisition (the Referral) for European Union merger review under Article 22(1) of Council Regulation (EC) No 139/2004 (the EU Merger Regulation), which had been submitted by a Member State of the European Union (France) and joined by several other EEA Member States (Belgium, Greece, Iceland, the Netherlands and Norway). On July 13, 2022, the EU General Court ruled that the European Commission has jurisdiction to review the Acquisition under the EU Merger Regulation. On September 22, 2022, we filed an appeal in the Court of Justice of the European Union (the EU Court of Justice) asking for annulment of the EU General Court’s decision. On December 12, 2023, the Court of Justice of the European Union held a hearing on the appeal. On March 21, 2024, the Advocate General assigned to this case recommended, in a non-binding Opinion, that the EU Court of Justice annul the European Commission’s decisions accepting referral of the GRAIL acquisition for EU merger review.
As previously disclosed, on October 29, 2021, the European Commission adopted an order imposing interim measures (the Initial Interim Measures Order), which was renewed on October 28, 2022 (subject to (x) certain operational modifications and (y) an express prohibition on Illumina selling, transferring, encumbering or otherwise disposing of GRAIL or any of GRAIL’s assets), provided that (i) we ensure that Illumina and GRAIL will continue to operate as independent legal entities that transact at arms’ length, no integration activity will take place, the day-to-day operation of GRAIL will remain the sole responsibility of GRAIL’s management and our management will have no involvement in or influence over GRAIL, (ii) we take certain supportive measures to preserve GRAIL’s viability, marketability and competitiveness, including with respect to the provision of resources to GRAIL and the retention and/or replacement of key personnel of GRAIL, (iii) subject to limited exceptions, we implement all necessary measures to ensure that Illumina does not obtain any confidential information relating to GRAIL during the hold separate period and vice versa and (iv) we appoint an independent firm as monitoring trustee to monitor our compliance with the Initial Interim Measures Order. An independent monitoring trustee has been appointed. Such hold separate arrangement, and our obligations pursuant thereto, have imposed implementation and administrative processes and additional legal, financial advisory, regulatory and other professional services costs, which have been burdensome to implement and administer, and which we expect to continue for the duration of the hold separate arrangement (in the form of transitional measures imposed on Illumina pursuant to a decision adopted by the European Commission on October 12, 2023 (the EC Divestment Decision), which replaced the New Interim
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Measures Order). Such burdens and additional costs, independently or together with additional burdens, costs and/or liabilities arising from such arrangement, may result in loss of revenue and other adverse effects on our business, financial condition and results of operations. Moreover, our failure to comply with the terms of the EC Divestment Decision may result in the European Commission seeking to impose fines or other penalties on us. On January 10, 2023, we filed an action with the EU General Court asking for annulment of the New Interim Measures Order. On January 20, 2023, the European Commission requested that these proceedings be stayed pending our appeal on jurisdiction.
We submitted a filing indicating that we had no objections to the European Commission’s request, and the EU General Court stayed the proceedings on February 21, 2023.
On September 6, 2022, the European Commission announced that it had completed its Phase II review of the Acquisition and adopted a final decision (the Prohibition Decision), which found that, in its view, our acquisition of GRAIL was incompatible with the internal market in Europe because it results in a significant impediment to effective competition. On November 17, 2022, we filed an action with the EU General Court asking for annulment of the Prohibition Decision. On October 12, 2023, the European Commission adopted the EC Divestment Decision requiring us to (among other things) divest GRAIL and imposing the transitional measures. On December 22, 2023, we filed an action with the EU General Court seeking an annulment of the EC Divestment Decision.
The Prohibition Decision, the EC Divestment Decision, and any order or decision by the FTC or any other governmental or regulatory authority pursuant to which Illumina is required to divest GRAIL (an FTC Divestment Decision), if implemented once final and non-appealable or during the pendency of the applicable appeals proceedings, and our obligations pursuant thereto, have imposed in the past and may impose in the future significant costs and additional liabilities on us, including significant legal, financial advisory, regulatory and other professional services fees and additional expenses, and may result in loss of revenue and other adverse effects on our business, financial condition and results of operations. Such adverse effects could include divesting GRAIL on terms that are materially worse than the terms on which we acquired GRAIL. Furthermore, we may not be able to direct the timing, structure or financial terms of such divestment, which could result in negative financial or tax consequences. For example, we are unlikely to be able to, in a sale of GRAIL, effect such sale in a non-taxable transaction and so would incur significant tax liabilities attributable to the recognition of taxable gain equal to the difference between (i) the fair market value of any consideration received and (ii) our tax basis in GRAIL (which tax basis is currently estimated to be between zero and $500 million). In addition, any such divestment will likely implicate certain provisions in our third-party contracts and other agreements, including our obligations with respect to the contingent value rights (the CVRs) issued by us as part of the Acquisition. We may be unable to fully discharge our obligations with respect to the CVRs in connection with any such divestiture, and/or such divestiture may result in a change in obligor on the CVRs. To the extent that Illumina has remaining obligations under the CVR Agreement following a divestment, Illumina may have more difficulty estimating the future liabilities associated with any liability associated with the CVRs once it no longer owns GRAIL. Moreover, the business of GRAIL may be adversely affected by any such divestment, which could adversely affect the market value of the CVRs. The EC Divestment Decision requires us to ensure that GRAIL has access to sufficient funds to cover at least 2.5 years of operations according to its latest long-range plan. We expect the amount of such funding will be approximately $1 billion, which includes cash from GRAIL’s balance sheet.
The Initial Interim Measures Order, the New Interim Measures Order, the Prohibition Decision, and the EC Divestment Decision, or an FTC Divestment Decision or any other order or decision by any other governmental or regulatory authority, if implemented once final and non-appealable or during the pendency of the applicable appeals proceedings, have in the past and could may also in the future divert management’s attention and company resources away from existing operations and other opportunities that may have been beneficial to us, any or all of which, individually or in the aggregate, could have a material adverse effect on our business, financial condition and results of operation. We have experienced and might continue to experience negative impacts on our stock price. We cannot predict what other adverse consequences to, among other things, our reputation, our relationships with governmental or regulatory authorities, or our ability to successfully complete future transactions, our ability to attract, retain and motivate customers, key personnel and those with whom we conduct business may result.
On July 12, 2023, the European Commission adopted a final decision finding that we breached the EU Merger Regulation by, in its view, acquiring the possibility to exert decisive influence over GRAIL and exerting such influence during the pendency of the European Commission’s review (the Article 14(2)(b) Decision). The European Commission therefore imposed a fine on us pursuant to Article 14(2)(b) of the EU Merger Regulation of
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approximately €432 million, representing the maximum fine of 10% of our consolidated annual revenues for fiscal year 2022. We provided guarantees in October 2023 to satisfy the obligation in lieu of cash payment while we appeal the European Commission’s jurisdictional decision and fine decision. As of March 31, 2024, we accrued $478 million, including related accrued interest and foreign currency fluctuations, included in accrued liabilities. In addition, the European Commission, the FTC and/or other governmental or regulatory authorities may seek to impose other fines, penalties, remedies or restrictions. We expect to continue to hold the assets or equity interests of GRAIL separate until the divestment of GRAIL is effected, which could result in additional costs or liabilities, loss of revenue and other adverse effects on our business, financial condition and results of operations. In addition, under applicable accounting rules, we may be required from time to time to perform interim analyses of the value of GRAIL. To the extent that the value of GRAIL on a standalone basis is less than its book value, we would be required to record an impairment on our consolidated financial statements. For example, as previously disclosed, we recorded a goodwill impairment of $712 million related to our GRAIL reporting unit in the third quarter of 2023, primarily due to a decrease in our consolidated market capitalization and a higher discount rate selected for the fair value calculation of the GRAIL reporting unit.
On December 17, 2023, we announced that we will divest GRAIL. The divestiture is expected to be executed through a third-party sale or capital markets transaction in accordance with the EC Divestment Decision, with the goal of finalizing the terms of the divestiture by the end of the second quarter of 2024. There can be no assurance regarding the ultimate timing of the divestiture of GRAIL. Completion of the divestiture of GRAIL will be subject to the satisfaction of certain conditions, including, the receipt of required regulatory approvals. There can be no assurance regarding the ultimate timing of the divestiture of GRAIL. Unanticipated developments could delay, prevent or otherwise adversely affect the divestiture of GRAIL, including but not limited to disruptions in general or financial market conditions or potential problems or delays in obtaining various regulatory clearances.
Furthermore, we have and may continue to become subject to stockholder inspection demands under Delaware law, investigations initiated by regulators and law firms, and derivative or other similar litigation that can be expensive, divert management attention and human and financial capital to less productive uses and result in potential reputational damage. The GRAIL acquisition and subsequent litigation resulted in (i) the announcement of an investigation by the SEC and others by law firms of possible securities law violations; (ii) stockholder inspection demands seeking to investigate possible breaches of fiduciary duties, corporate wrongdoing or a lack of independence of the members of the Board, including a complaint filed in the Delaware Court of Chancery seeking to inspect books and records captioned Pavers and Road Builders Benefit Funds v. Illumina, Inc.; (iii) the filing of four securities class actions in the United States District Court for the Southern District of California: Kangas v. Illumina, Inc. et al., Roy v. Illumina, Inc. et al., Louisiana Sheriffs’ Pension & Relief Fund v. Illumina, Inc. et al. and Warner v. deSouza et al.; (iv) the filing of a securities class action in the United States District Court for the District of Delaware captioned Wang v. deSouza et al.; (v) the filing of two securities class actions in the Superior Court of the State of California, County of San Mateo: Loren Scott Mar v. Illumina, et al. and Scott Zerzanek v. Illumina, Inc. et al.; (vi) the filing of a stockholder derivative and class action complaint captioned Icahn Partners LP, et al. v. deSouza, et al.; (vii) the filing of a stockholder derivative complaint captioned City of Omaha Police and Firefighters Retirement System v. deSouza, et al.; and (viii) the filing of a stockholder derivative complaint captioned City of Roseville General Employees Retirement System, et al. v. deSouza, et al. The Icahn Partners LP, et al. v. deSouza, et al., City of Omaha Police and Firefighters Retirement System v. deSouza, et al. and City of Roseville General Employees Retirement System, et al. v. deSouza, et al. complaints, purportedly brought on behalf of Illumina, and in Icahn Partners LP, also public holders of Illumina’s common stock, were filed in the Delaware Court of Chancery against certain current and former directors and officers. We are named as a nominal defendant in the complaints. The Icahn Partners LP, et al. v. deSouza, et al. lawsuit alleges the named directors breached their fiduciary duties by knowingly causing Illumina to unlawfully close the GRAIL acquisition, concealing material facts related to the GRAIL acquisition and making inadequate disclosures. The City of Omaha Police and Firefighters Retirement System v. deSouza, et al. and City of Roseville General Employees Retirement System, et al. v. deSouza, et al. lawsuits allege the named directors and officers breached their fiduciary duties by causing Illumina to unlawfully close the GRAIL acquisition. See note “7. Legal Proceedings” within the Consolidated Financial Statements for further details. In the event that any of the matters described above result in one or more adverse judgments or settlements, we may experience an adverse impact on our financial condition, results of operations or stock price.
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SHARE REPURCHASES AND SALES
Purchases of Equity Securities by the Issuer
None during the quarterly period ended March 31, 2024.
Unregistered Sales of Equity Securities
None during the quarterly period ended March 31, 2024.
ADOPTIONS, MODIFICATIONS OR TERMINATIONS OF TRADING PLANS
During the quarterly period ended March 31, 2024, the following directors and officers adopted, modified or terminated 10b5-1 plans:
•On February 28, 2024, Charles Dadswell, our General Counsel, entered in a new arrangement intended to satisfy the affirmative defense conditions of Rule 10b5-1(c). The arrangement terminates on December 31, 2024 and provides for the sale of up to 16,695 shares.
•On March 8, 2024, Alex Aravanis, our former Chief Technology Officer, Head of Research and Product Development, terminated a trading arrangement he had previously adopted with respect to the sale of securities of the Company’s common stock in connection with his departure from the Company. The arrangement was adopted on May 9, 2023, had a termination date of May 9, 2024, and provided for the sale of up to 15,486 shares of common stock pursuant to the terms of the plan.
Other than as disclosed above, during the quarterly period ended March 31, 2024, (i) none of the Company’s directors or officers adopted or terminated any “Rule 10b5-1 trading arrangement” or any “non-Rule 10b5-1 trading arrangement,” and (ii) the Company did not adopt a “10b5-1 trading arrangement,” in each case as such term is defined in Item 408 of Regulation S-K.
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EXHIBITS
| Incorporated by Reference | ||||||||||||||||||||||||||||||||||||||
| Exhibit Number | Exhibit Description | Form | File Number | Exhibit | Filing Date | Filed Herewith | ||||||||||||||||||||||||||||||||
X | ||||||||||||||||||||||||||||||||||||||
| 31.1 | X | |||||||||||||||||||||||||||||||||||||
| 31.2 | X | |||||||||||||||||||||||||||||||||||||
| 32.1 | X | |||||||||||||||||||||||||||||||||||||
| 32.2 | X | |||||||||||||||||||||||||||||||||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | X | ||||||||||||||||||||||||||||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema | X | ||||||||||||||||||||||||||||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | X | ||||||||||||||||||||||||||||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase | X | ||||||||||||||||||||||||||||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase | X | ||||||||||||||||||||||||||||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase | X | ||||||||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File - formatted in Inline XBRL and included as Exhibit 101 | X | ||||||||||||||||||||||||||||||||||||
__________________________________
+ Management contract or corporate plan or arrangement
* Certain schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished supplementally to the SEC upon request.
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FORM 10-Q CROSS-REFERENCE INDEX
| Page | |||||
| PART I. FINANCIAL INFORMATION | |||||
| PART II. OTHER INFORMATION | |||||
| Item 3. Defaults Upon Senior Securities | None | ||||
| Item 4. Mine Safety Disclosures | Not Applicable | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ILLUMINA, INC. (registrant) | |||||||||||
| Date: | May 3, 2024 | ||||||||||
| By: | /s/ ANKUR DHINGRA | ||||||||||
| Name: | Ankur Dhingra | ||||||||||
| Title: | Chief Financial Officer | ||||||||||
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